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Table of contents COVID-19 Socio Economic Impact of Sri Lanka - Part I

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COVID-19:

THE SOCIO-ECONOMIC IMPACT ON SRI LANKA

Part-I The Economic Impact of the COVID-19 Pandemic in Sri Lanka

Table of contents COVID-19 Socio Economic Impact of Sri Lanka - Part I

i

COVID-19:

THE SOCIO-ECONOMIC IMPACT

ON SRI LANKA

Part-I

The Economic Impact of the COVID-19 Pandemic in Sri

Lanka

August 2020

Faculty of Humanities and Social Sciences, University of Ruhuna,

Matara, Sri Lanka.

ii

Faculty of Humanities and Social Sciences

University of Ruhuna, Marata, Sri Lanka

Copyright © Faculty of Humanities & Social Sciences, University of Ruhuna

No part of this publication may be reproduced, distributed, or transmitted in any form or by

any means, including photocopying, recording, or other electronic or mechanical methods,

without the prior written permission of the publisher, except in the case of brief quotations

embodied in critical reviews and certain other non-commercial uses permitted by copyright

law. For permission requests, write to the publisher, addressed to “Attention: HSS Research

Coordinator”.

Publisher:

Faculty of Humanities and Social Sciences, University of Ruhuna, Wellamadama, Matara 81000,Sri Lanka. Tel +94 412222681 Ext. 3102; Fax +94 412227010 [email protected] First Published in 2020 Printed in Matara ISBN 978-955-1057-73-2 The views expressed in this publication are those of the authors (team of contributors) and do not necessarily reflect the views and policies of the University of Ruhuna (UOR) or its Administrative Authority or the Government they represent. Contact [email protected] for clarifications and copyright permission. How to cite this publication: Faculty of Humanities and Social Sciences. (2020). COVID-19: The Socio-Economic Impact on Sri Lanka. Part-1: The Economic Impact of the COVID-19 Pandemic in Sri Lanka. Matara: University of Ruhuna.

© Faculty of Humanities and Social Sciences-2020

ISBN 978-955-1057-73-2

Acknowledgements The economic impact of the COVID-19 pandemic in Sri Lanka


University of Ruhuna, Marata, Sri Lanka iii

ACKNOWLEDGMENTS

The Faculty of Humanities and Social Sciences (H&SS) conducted this research on the

Socio-Economic Impact of the COVID-19 Pandemic in Sri Lanka under the leadership

of Senior Professor Sujeewa Amarasena, Vice-Chancellor, University of Ruhuna, and

Professor Upali Pannilage, Dean of the Faculty of H&SS.

The COVID-19 Taskforce was set up to carry out this research with the

recommendations of Heads of the Departments and approval of the Faculty Board in

April 2020. The Taskforce worked as two sub-teams and this report, titled “The

Economic Impact of the COVID-19 Pandemic in Sri Lanka” is the output of the

Economic Impact Analysis team led by Dr Nisantha Kurukulasooriya.

Dr Nandasiri Keebiyahetti, the Overall Coordinator of the COVID-19: The Socio-

Economic Impact Research Project, is highly acknowledged for his able guidance,

supervision, and coordination. Our sincere thanks are due for Dr Wijerathne

Bohingamuwa, the Editor-in-Chief for his remarkable contribution to editing this

report. We also sincerely acknowledge Dr Neshantha Harischandra for editing the

language of the final report. Mr Saman Udayakantha, Head, Department of

Economics, deserves special thanks for deploying the department staff for the

research team.

We are particularly grateful for the anonymous respondents who contributed by

providing information and views during the online survey. Special thanks go to high-

ranking government officials and experts in ministries, agencies, and departments in

Sri Lanka who provided valuable information to complete this report.

This report is the result of dedicated teamwork. Many individuals and institutions,

such as industry or sectorial experts, provided valuable information required for the

compilation of this research report. Therefore, our sincere thanks are due for all

those who contributed to the outcome of this research. Some of the contributors,

however, are anonymously acknowledged as they wished to remain unnamed. .

The research team of the Faculty of H&SS-University of Ruhuna is particularly

grateful for the cooperation given by Mr Nigel Adams, Sales Manager, Keels Foods;

Mr Malinda Ariyawickerama, Sales Manager, Arpico Super Centre; Mr Sanjaya

Gunathilaka, Sales Manager, Cargills PLC; Mr Thisara Meegahawatta, Brand

Manager, Freelan – Matara; Mr Senaka Samarasinghe, Director, Harischandra PLC;

Mr Champika Malalgoda, BOI, Level 24, West Tower, World Trade Center, Colombo;

Ms Ganga Palaketiya, BOI, Level 24, West Tower, World Trade Centre, Colombo; Mr

P Godage, Deputy Director (Industrial Relations) Board of Investment of Sri Lanka,

Acknowledgements The economic impact of the COVID-19 pandemic in Sri Lanka

iv



Export Processing Zone, Koggala; Ms Rehan Lakhani, Chairman of the Sri Lanka

Apparel Exporters’ Association; Ms Tuli Cooray, Secretary General, the Joint Apparel

Association Forum (JAAF); Hoteliers Association, Chairman of the Association of

Safari Jeeps, Board of Investment, Mr K G D Chathura Malraj, AGA, DS Beruwala, Mr

H.A.D. Kumararathna, Deputy Director, Small Enterprises Development Division

District Secretariat, Rathnapura, Mr P.K. Pathirana, Provincial Assistant Director,

Small Enterprises Development Division District Secretariat, Kalithara, Mrs Janaki

Wijesiri, Assistant Director, Research and Development Unit, SED Head Office,

Colombo 07, Mr K.G.S.K. Manthilake, Assistant Director, Small Enterprises

Development Division District Secretariat, Ampara, Ms K.R.N. Malkanthi, Assistant

Director, Small Enterprises Development Division, District Secretariat, Matale, Mr

R.M.S. Rathnayake, EDTO, Small Enterprises Development Division District

Secretariat, Monaragala and Mr Jayani Ratnayake.

The COVID-19, Economic Impact Analysis Team

Contributors The economic impact of the COVID-19 pandemic in Sri Lanka


University of Ruhuna, Marata, Sri Lanka v

CONTRIBUTORS

Editor-in-Chief Language Editor

Dr Wijerathne Bohingamuwa is a Senior

Lecturer at the Department of History &

Archaeology, Faculty of Humanities & Social

Sciences University of Ruhuna with research

interests in Irrigation Archaeology of Sri

Lanka, Indian Ocean maritime connections,

Indigenous communities and traditional

lifestyles. He holds a BA Honours degree

(First Class) in Archaeology from the Banaras

Hindu University, India MA in Prehistoric

Archaeology (First Class) from the Deccan

College in Pune, MPhil (High Pass) from the

University of Cambridge and PhD from the

University of Oxford. He is a Clarendon

Scholar & the Editor- in- Chief, of the Journal

of the Royal Asiatic Society of Sri Lanka.

[email protected]

Dr D.V.N. Harischandra is a Senior Lecturer

at the Department of English and

Linguistics, Faculty of Humanities & Social

Sciences, University of Ruhuna. She

specializes in Feminist Literary Criticism,

Postcolonial Literature and the Sri Lankan

Women’s Novel in English. She holds BA

Honours and MPhil degrees in the field of

English from the University of Peradeniya

and a PhD in English from Jawaharlal Nehru

University, New Delhi, India.

[email protected]

Principal Researcher

Dr Nisantha A. Kurukulasooriya is a Senior Lecturer in Social Statistics at the Department of Economics, Faculty of Humanities and Social Sciences University of Ruhuna with research interests in Time Series approaches for modeling of Tourism, Parametric and Nonparametric Efficiency Analysis, Economics of Education. He holds a BA Honours (First Class) degree in Social Statistics and Postgraduate Diploma in Statistics from the University of Sri Jayawardanapura, MSc. degree in Applied Statistics and a PhD from the University of

Colombo. He is also the Editor-in-Chief of the Journal of Social Sciences and Humanities Review. He also serves as an editor in several international journals. [email protected]


vi



Co-researcher

Dr Nandasiri Keembiyahetti is a Senior Lecturer in Economics at the Department of Economics, Faculty of Humanities and Social Sciences University of Ruhuna with research interests in Trade, Finance, and Banking. He holds a BA Honours (First Class) degree in Economics from the University of Peradeniya, MSc. degree in Social Sciences from the National University of Singapore and PhD from the University of Colombo.

[email protected]

Co-researcher

Dr A.J.M. Chandradasa is a Senior Lecturer in Economics at the Department of Economics, Faculty of Humanities and Social Sciences University of Ruhuna with research interests in Microfinance and Rural Development. He holds a BA Honours degree in Economics from the University of Peradeniya, MA in Economics from the University of Ruhuna, Postgraduate Diploma in Education from the National Institute of Education Sri Lanka and PhD in Economics from the South Asian Studies Centre of the University of Rajasthan, India. [email protected]

Co-researcher

Mr H.K. Sarath is a Senior lecturer in Economics at the Department of Economics, Faculty of Humanities and Social Sciences University of Ruhuna with research interests in Development Economics and Rural Poverty. He holds BA Honours degree in Economics from the University of Ruhuna and MPhil in Economics from the University of Peradeniya and a Doctoral Candidate at the University of Ruhuna. [email protected]

Co-researcher

Mr Kamal Kandewatta is a Lecturer (Probationary) in Economics at the Department of Economics, Faculty of Humanities and Social Sciences University of Ruhuna with research interests in International Trade, Macroeconomics and Financial Economics. He holds a BA Honours degree in Economics and reading for his MA degree in Economics at the University of Colombo. [email protected]



University of Ruhuna, Marata, Sri Lanka vii

Research Assistant

Mrs W.P.S Rajapakshe is a Senior Lecturer in

Economics at the Department of Economics,


University of Ruhuna with research interests

in Malnutrition & Poverty, Population and

Unemployment. She holds a BA Honours

degree in Economics and MA in Economics

from the University of Sri Jayawardanapura

and MPhil from the University of Ruhuna.

[email protected]

Research Assistant

Mr L.K. Kapila Peiris is a Senior Lecturer in

Economics at the Department of

Economics, Faculty of Humanities and

Social Sciences, University of Ruhuna with

research interests in Consumption and

Production. He holds a BA Honours degree

in Economics from the University of

Colombo and MPhil in Economics from the

University of Ruhuna.

[email protected]

Research Assistant

Mr W.A.N.D. Wijesinghe is a senior lecturer in Computer Applications at the Department of Economics, Faculty of Humanities and Social Sciences University of Ruhuna with research interests in Information Management and Online Banking. He holds a BSc Honours degree in Mathematics from the University of Ruhuna and MCA degree from the Bangalore University, India. [email protected]

Research Assistant

Mrs Anne Jithma Jayasekara is a Lecturer (Probationary) in Social Statistics at the Department of Economics, Faculty of Humanities and Social Sciences University of Ruhuna with research interests in Time Series Modeling, Applied Econometrics, Computational Statistics and Multivariate Modeling. She holds a BA Honours degree in Social Statistics from the University of Ruhuna, PGDip in Applied Statistics from the University of Colombo and reading for MPhil at the the University of Ruhuna. [email protected]


viii



Research Assistant

Ms I.G. Sulakkana Kumari is a Lecturer (Probationary) in Economics at the Department of Economics, Faculty of Humanities and Social Sciences University of Ruhuna with research interests in Money, Banking & Finance, Environmental Economics, and Development Economics. She holds a BA Honours degree from the University of Ruhuna and reading for her MA degree in Economics at the University of Colombo. [email protected]

Research Assistant

Mrs Anuradha Gamage is a Lecturer (Probationary) in Social Statistics at the Department of Economics, Faculty of Humanities and Social Sciences University of Ruhuna with research interests in Time Series Analysis, Goal Programming, Factor and Discriminant Analysis. She holds a BSc degree in Statistics and Operations Research from the University of Peradeniya and reading for her MSc. degree in Business Statistics at the University of Moratuwa. [email protected]

Research Assistant

Mrs S.S. Langappuli is an Assistant Temporary Lecturer in Social Statistics at the Department of Economics, Faculty of Humanities and Social Sciences University of Ruhuna with research interests in Econophysics, Gender Statistics and Psychometrics. She holds a BA Honours (First Class) degree in Social Statistics from the Sabaragamuwa University. [email protected]

Research Assistant

Mrs B.W.M.N.M. De Silva is an Assistant Temporary Lecturer in Social Statistics at the Department of Economics, Faculty of Humanities and Social Sciences University of Ruhuna with research interests in Mathematical Modeling in Real-world Phenomena. She holds a BSc Honours degree in Mathematics and Statistics from the University of Ruhuna and Reading for her PhD at the University of Colombo. [email protected]



University of Ruhuna, Marata, Sri Lanka ix

Research Assistant Ms A.N. Nirikshani Mendis is an Assistant Temporary Lecturer in

Economics at the Department of Economics, Faculty of

Humanities and Social Sciences University of Ruhuna with

research interests in Trade Policies, Macroeconomic Policy

Issues and Public Finance. She holds a BA Honours degree in

Economics from the University of Ruhuna and reading for her

MA degree in Economics at the University of Colombo.

[email protected]

Table of contents The economic impact of the COVID-19 pandemic in Sri Lanka

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TABLE OF

CONTENTS

ACKNOWLEDGMENTS ..................................................................................................... iii

CONTRIBUTORS .............................................................................................................. v

TABLE OF CONTENTS ................................................................................................. x

LIST OF TABLES .................................................................................................... xii

LIST OF FIGURES ................................................................................................. xiii

ABBREVIATIONS ............................................................................................................. xiv

EDITORIAL NOTE ........................................................................................................xvii

Executive summary ................................................................................................. xxi

Chapter-I Methodological Approach to the Research ....................................... 2

1.1. Introduction ............................................................................................................... 2

1.2. Objectives and scope of the study ............................................................................. 2

1.3. Research hypothesis .................................................................................................. 3

1.4. Research design ......................................................................................................... 3

1.5. Data collection procedures ........................................................................................ 5

1.6 Results and discussions .............................................................................................. 6

1.7 Ethical considerations ................................................................................................ 6

1.8 Chapter summary....................................................................................................... 7

Chapter-II The Economic Background of Sri Lanka before the COVID-19 Pandemic .................................................................................................................. 10

2.1. Introduction ............................................................................................................. 10

2.2. Sri Lanka at a glance ................................................................................................. 10

2.3 The five major economic booms .............................................................................. 11

2.4 Industry and the service sector performance .......................................................... 13

2.5 Changing of the development policies .................................................................... 15

2.6 The progress of foreign policy and foreign aid ........................................................ 18

2.7 Sri Lanka just before the COVID-19 .......................................................................... 20

2.8 Chapter summary..................................................................................................... 21

Table of contents The economic impact of the COVID-19 pandemic in Sri Lanka


University of Ruhuna, Marata, Sri Lanka xi

Chapter-III The COVID-19 Impacts on Households in Sri Lanka with Special Reference to the Southern Province ..................................................... 24

3.1 Introduction ............................................................................................................. 24

3.2 Analysis of the sample information ......................................................................... 25

3.3 The COVID-19 impact on household activities ........................................................ 29

3.4 Chapter summary .................................................................................................... 45

Chapter-IV The COVID-19 Impacts on Diverse Sectors in the Sri Lankan Economy ................................................................................................................... 50

4.1 Introduction ............................................................................................................. 50

4.2 Micro, small and medium-scale enterprises ............................................................ 50

4.3 Impact on Sri Lanka stock market ............................................................................ 56

4.4 Textile and garment sector ...................................................................................... 60

4.5 Construction sector .................................................................................................. 66

4.6 Retail and consumer goods market ......................................................................... 70

4.7 Private sector trade chambers involvement ............................................................ 72

4.8 Travel and tourism in Sri Lanka ................................................................................ 76

4.9 Government revenue collection .............................................................................. 83

4.10 Banking and finance sector ...................................................................................... 88

4.11 Government relief package and its implications ..................................................... 93

4.12 Chapter summary .................................................................................................... 98

Chapter-V Policy Implications for Potential Recovery on Post COVID-19.................................................................................................................................. 102

5.1 Introduction ........................................................................................................... 102

5.2 Monitory policy ...................................................................................................... 102

5.3 Fiscal policy ............................................................................................................ 105

5.4 Supply side policies ................................................................................................ 105

List of References ................................................................................................. 111

List of tables The economic impact of the COVID-19 pandemic in Sri Lanka

xii



LIST OF

TABLES

Table 3.1: Educational qualifications of the respondents ....................................................... 28

Table 3.2: Cross tabulation – Changes of income versus changes of job status after the

COVID-19 .................................................................................................................................. 30

Table 3.3: Relationship between the changes of income versus changes of business after the

COVID-19 .................................................................................................................................. 31

Table 4.1 Sovereign Credit Ratings of Sri Lanka from 2018 to 2020 ........................................ 58

Table 4.2 : Number of garment factories and employment in export processing and industrial

zones in Sri Lanka, 2020 ........................................................................................................... 63

Table 4.3: Monthly tourist arrivals to Sri Lanka from January 2019 to March 2020 ............... 78

Table 4.4: The percentage composition of assets and liabilities in the banking sector .......... 89

Table 4.5: Sovereign Credit Ratings of Sri Lanka as at 20 May 2020 ....................................... 97

List of figures The economic impact of the COVID-19 pandemic in Sri Lanka


University of Ruhuna, Marata, Sri Lanka xiii

LIST OF

FIGURES

Figure 3.1: District-wise percentage distribution of households in the sample ...................... 25

Figure 3.2: Civil status of the respondents .............................................................................. 26

Figure 3.3: Composition of age-group structure of the sample .............................................. 27

Figure 3.4: Gender distribution of the respondents. ............................................................... 27

Figure 3.5: The COVID--19 impact on household income ........................................................ 29

Figure 3.6: Comparison of before and after mean levels of expenditure per household ....... 31

Figure 3.7: Contributors to savings during period of the COVID-19 and economic lockdown 33

Figure 3.8: The COVID-19 impact on household indebtedness ............................................... 34

Figure 3.9: Loan categories of households during pandemic .................................................. 35

Figure 3.10: Changing employment status due to the COVID-19 pandemic ........................... 36

Figure 3.11: Financial loss due to the COVID-19 pandemic ..................................................... 37

Figure 3.13: Effect of the COVID-19 on fixed assets of households ........................................ 39

Figure 3.14: Effect of the COVID-19 on household assets ....................................................... 40

Figure 3.15: The COVID-19 most affected categories in the economy .................................... 41

Figure 3.16: Habits to be continued after the COVID-19 pandemic by Sri Lankan households

................................................................................................................................................. 42

Figure 3.17: Financial assistance required to address financial difficulties due to the COVID-

19 ............................................................................................................................................. 44

Figure 3.18: Type of expected technical assistance after the COVID-19 pandemic ................ 45

Figure 4.1: The behaviour of S&P SL 20 share index before closedown in March 2020 ......... 56

Figure 4.2: The behaviour of the ASPI before closedown in March 2020 ............................... 57

Figure 4.3: The behaviour of S&P SL 20 after reopening in May 2020 .................................... 57

Figure 4.4: The behaviour of ASPI after reopening in May 2020 ............................................. 58

Figure 4.5: Potential gainers and losers in the stock market ................................................... 59

Figure 4.6: Percentage share of export destinations for the textile and garment industry of

Sri Lanka, 2019 ......................................................................................................................... 62

Figure 4.7: Employment in the textiles and garment industry, 2020, by industrial zones ..... 64

Figure 4.8: Tourist arrivals and earnings from tourism 2015-2019 ......................................... 76

Figure 4.9: Regaining of travel and tourism in the world ........................................................ 83

Figure 4.10: Distribution of monthly revenue collection in 2018 ............................................ 85

Figure 4.11: Percentage distribution of tax revenue of Sri Lanka-2019 .................................. 86

Figure 4.12: Composition of loans and advances of the banking industry (2019) .................. 90

Abbreviations The economic impact of the COVID-19 pandemic in Sri Lanka

xiv



ABBREVIATIONS

ADB Asian Development Bank

ASPI All Share Price Index

ATPS Alternative Tax Payment System

BOI Board of Investment of Sri Lanka

CBSL Central Bank of Sri Lanka

CEO Chief Executive Officer

COBP Country Operations Business Plan

COVID-19 Coronavirus Disease 2019

CPC Ceylon Petroleum Cooperation

CPI Corruption Perceptions Index

CRB Cooperative Rural Banks

CSE Colombo Stock Exchange

DFI Development Finance Institutions

EPZ Export Processing Zone

EU European Union

FDI Foreign Direct Investment

FTSE UK Financial Times Stock Exchange

GDP Gross Domestic Product

GICS Global Industry Classification Standard

GOSL Government of Sri Lanka

GSP+ General System of Preference

HDI Human Development Index

HPB Health Promotion Bureau

ICT Information and Communications Technology

IMF International Monetary Fund

Ind. Park Industrial Park

IRU Investor Relations Unit

IT - BPO Information Technology - Business Process Outsourcing

JAAF Joint Apparel Association Forum



University of Ruhuna, Matara, Sri Lanka xv

JVP Janatha Vimukthi Peramuna

LCB Licensed Commercial Banks

LKR Sri Lankan Rupee

LTR Local Trust Receipt Loans

LTTE Tigers of Tamil Elam

MDGs Millennium Development Goals

MSCI Morgan Stanley Capital International

MSMEs Micro, Small and Medium-scale Enterprises

MTI Medical Training Initiative

NAM Non-Aligned Movement

NBT Nation Building Tax

NPLs Non-Performing Loans

PAYE Pay As You Earn

PHCR Poverty Headcount Ratio

PPE Personal Protective Equipment

PPPs Public-Private Partnership Strategy

ROA Return on Assets

ROE Return on Equity

SAARC South Asian Association for Regional Cooperation

SBS Samurdhi Banking Societies

SEEDS Sarvodaya Economic Enterprise Development Services

SLTDA Sri Lanka Tourism Development Authority

SLTPB Sri Lanka Tourism Promotional Bureau

SME Small Medium Enterprises

SOE State Owned Enterprises

SRR Statutory Reserve Ratio

TCC Thrift and Credit Cooperative Societies

TD Tourism related discussions

UN United Nations

UNDP United Nations Development Programme

UNHCR United Nations High Commissioner for Refugees


xvi



UNICEF United Nations International Children’s Emergency Fund

UNWTO United Nations World Tourism Organization

USAID United State Agency for International Development

USD United States Dollars

VAT Value Added Tax

WB World Bank

WFH Work From Home

WHO World Health Organization

WHT Withholding Tax

Editorial Note The economic impact of the COVID-19 pandemic in Sri Lanka


University of Ruhuna, Matara, Sri Lanka xvii

EDITORIAL

NOTE

One of the key roles of university academics is to carry out research; either pure or

applied. While the pure or fundamental research advances the frontiers of existing

scientific knowledge, applied research attempts to find solutions to practical issues or

challenges faced by people in their everyday life. In reality, however, both pure and

applied research are interrelated and interdependent, each type contributing to the

advancement of the other.

The threat enforced by the COVID-19 pandemic is probably one of the biggest challenges

ever faced by humanity. The novel Coronavirus, as it is generally known, has threatened

the entire world, irrespective of social and economic background. The main focus of the

world today, therefore, is either to eradicate the virus or overcome its effects on society

at large. Experts in the medical field across the world are working tirelessly and

collaboratively to find vaccines for the virus, others are researching on the possible

effects of the virus on various aspects of society. The present work falls into the second

category.

The Faculty of Humanities and Social Sciences of the University of Ruhuna, in keeping

with its academic and social responsibility, initiated a research project to study the

Socio-economic impact of the COVID-19 pandemic in Sri Lanka. The aim of this research

was to understand the effects of the COVID-19 pandemic on the economy and society in

Sri Lanka and make viable policy recommendations to overcome them.

This research was undertaken as two separate, but interlinked research projects, under

an Overall Coordinator and two Subject Specialist Coordinators, each comprising its own

team of researchers, selected to represent various aspects of economy and society. The

outcomes of this research are presented as two separate reports. The present report is

Part I: The economic impact of the COVID-19 pandemic in Sri Lanka, while the other is

Part II: The social impact of the COVID-19 pandemic in Sri Lanka. This second aspect of

the research should also be considered as an integral part of our overall research and

the reader is encouraged to consult both reports to understand the bigger picture of the

effect of the novel Coronavirus in Sri Lanka.

The present report deals with the economic impact of the COVID-19 pandemic in Sri

Lanka. The impact of the virus on the economy was looked at at two levels: The Sri

Lankan economy as a whole, and individual households. In the first category, key state

and private sector economic aspects -- 19 different sectors --were considered. The

smallest unit of the economy, household livelihood, is vital for the economy of the island

and this research paid adequate attention to that as well. In terms of the impact of

COVID-19 at the individual level, the public sector employees were the least affected. In

comparison, employees in the service sector and those employed in micro or family


xviii



enterprises, as well as daily-wage-workers were severely affected. This research reveals

that the impact of the COVID-19 in many aspects of the Sri Lankan economy, however, is

temporary. Several sectors, such as travel and tourism, are likely to have mid to long-

term effects of the Coronavirus. The policy recommendations made in this report are

based on careful analysis of research findings and deserve the serious attention of policy

makers.

The Coronavirus delinked the so-called ‘globalized world village’ into isolated entities.

Even the next-door neighbours were physically disconnected from each other. It is the

technology, through its ability to create virtual links, which keeps the world together.

The effects of the Coronavirus are also reflected in the research strategy adopted in the

present study. As is evident from the chapter on Research Methodology, the entire

research was carried out using virtual questionnaires and interviews. The research team

could not meet physically and all planning and implementation, as well as data analysis

and the writing of the research outcomes were undertaken by the team members in

physical isolation. Consequently, the compiling of this report was, in a way, ‘piecing

together’ fragmentary chapter sections written by many individuals in seclusion. This

challenging task was done by Dr Nisantha Kurukulasooriya and Dr Nandasiri

Keembiyahetti, the Subject Coordinator and the Overall Coordinator, respectively, with

whom I had a great understating during the entire process. This made my task, as editor,

more easy, but my challenge was to bring uniformity to this ‘piecemeal writing’, so as to

present a coherent picture. I wish I had adequate time to accomplish this task. We were

all, however, compelled to keep to a tight timeline. The language editor, Dr D.V.N.

Harischandra, had her own challenge to edit the entire report in less than three days.

And economics is not even being her field of specialization; neither is it mine. Similarly,

Mr W.A.N.D. Wijesinghe had an even shorter period of time to format the entire report.

Thus, the entire team involved in this endeavour had to work under severe stress and

the constraints enforced by the lockdown and ‘stay at home’ situations. Pressure to

finish the report and make policy recommendations without delay, while also

performing the assigned university duties of the team members was exhausting. This

report is the outcome of our struggle to accomplish research objectives under these

circumstances and the reader is the best judge of our efforts.

The final aim of this research project is to bring a comprehensive research volume where

it is expected that the limitations of the present volume are overcome.

I wish to express my sincere gratitude to the Overall Coordinator, the Subject-specialist

Coordinator, the Language Editor and the team of contributors, as well as the

participants of this research project, without whose assistance this report would not

have been possible.

Wijerathne Bohingamuwa, MPhil (Cantab), PhD (Oxon)

Editor-in-Chief



University of Ruhuna, Matara, Sri Lanka xix


Executive summary The economic impact of the COVID-19 pandemic in Sri Lanka


University of Ruhuna, Matara, Sri Lanka xxi

Executive summary

The COVID-19 pandemic has made an unprecedented threat on both

the health status and the smooth functioning of economies in the

world, and Sri Lanka is no exception. The outbreak was hindered on

all facets of economies creating unprecedented challenges to

policymakers with the presence of liquidity crisis, employment

layoff, disturbances on international trade, and bans on travel and

tourism.

The direct health impacts are significantly low in Sri Lanka compared

to the other regions of the world, particularly in Asia. There were

2770 confirmed cases, 653 active cases in hospitals with 11 deaths

while 2106 recovered and discharged from hospitals as of 26th July

2020 in Sri Lanka (Health Promotion Bureau, 2020). The impact of

the ongoing pandemic severely affected and further worsened the

livelihood of individuals and families in the country with the

enforcement of continued islandwide curfew, cross-border mobility

restrictions, lockdown of the country and regulations such as social

distancing and other health precautions.

The current situation has created an urgent need to assess the

economic impact of the COVID-19 on Sri Lankan households to

identify the way to mitigate the impacts of the crisis. The University

of Ruhuna decided to conduct a rapid survey to achieve the needful.

An online survey was conducted to investigate the micro-level

impact with a sample of 1087 respondents from 22 administrative

districts in Sri Lanka. Further, in-depth interviews with experts in

many sectors were also conducted to evaluate the micro-level

impact of the pandemic with an enormous review of current

literature. Following are the highlights of the research.

Income loss is impermanent and not painful

The income sources of 64% of the households have been affected

while 7% lost their entire income. The research concerned the

household conditions but not the individual income status. There is

no association between change of income and change of job status

after the COVID-19 outbreak and thus the loss of household income

will be temporary loss of their jobs and other income sources.

Seven per cent of the

households lost their

income entirely while

the income loss for

the rest of the

households is

temporary.


xxii



However, 3% of households lost their entire livelihood due to the

pandemic.

Changes of expenditure and savings are provisional

Education, transport, entertainment expenditure, medicine and loan

repayment expenditure significantly declined and it can be assumed

that all these changes are provisional and thus people will be on the

pre-pandemic track in the post-COVID-19 period. Electricity bills,

internet cost and donations have noticeably increased. Two per cent

of households experienced net losses instead of savings and the loss

was estimated to LKR 60,000 per household on average per month

during the period of the economic lockdown. Fifteen per cent of

households reported no losses or no savings. Average savings

amounted to LKR 70,000 while the median savings per household

amounted to LKR 20,000.

The COVID-19 has not created a debt trap

No change in debt liabilities was reported in 79 % of the households

whereas only 6 per cent of the household has fallen to indebtedness

due to the COVID-19 outbreak. The COVID-19 has not created a debt

trap for many of the households in Sri Lankan economy. Five to ten

per cent of the households borrowed on loan repayments and daily

consumption needs while a very small percentage of households

borrowed for medical treatment and bill payments. Just 8% of

households are seeking support for repayments of loans borrowed

during the pandemic.

Day payment workers are mostly vulnerable

Approximately 82% of households were resilient to the crisis since

they were fixed income earners. Seven per cent of the household

heads totally lost their employment. Ninety-two per cent of the

respondents claimed that daily basis workers were mostly

vulnerable to pandemic shocks while, 80% claimed that three-

wheeler owners are also vulnerable. However, the loss for many

other segments is not limited to the income foregone, but includes

the fixed cost they have to bear (monthly rental for business

premises) even in the absence of income.

The estimated loss

due to economic

lockdown is LKR

60,000 per household

on average per

month.

Only 6 per cent of the

household has fallen

to indebtedness due

to the COVID-19

outbreak.

Fixed salary holders

are safe and daily

basis workers are the

most vulnerable to

pandemic shocks.



University of Ruhuna, Matara, Sri Lanka xxiii

No harm on household assets base

Approximately 10% of the households have mortgaged their

jewellery and related items such as mobile phones to solve

temporary liquidity problems and there was no substantial effect on

other types of real assets. Cash balances and current/savings

account balances markedly declined. On part of the liabilities, credit

card outstanding balances, borrowings and procrastinated leasing

instalments have considerably increased.

The COVID-19 changed lifestyles of households

Sri Lankans have changed their attitudes and practices with the

effect of the new COVID-19 outbreak. Nearly 75% of households are

ready to continue with the activities initiated during the post-COVID-

19 period, including home gardening. Forty-six per cent of

households have understood that they are wasting foods and

consumables. It was revealed that smoking and alcohol usage would

not be reduced.

Debt moratorium just a cushion for financial difficulties

More than 50% of households are refusing financial assistance

during the post-COVID-19 period while around 45% of households

are seeking financial support for loan repayment, redeeming

mortgaged items, paying outstanding credit card balances and other

bill payments. The current debt moratorium introduced by the

Central Bank for three months will provide only a cushion, the

liabilities will be accumulated and both borrower and the lending

institution will be in trouble after three months, unless the

borrower’s income sources are regained.

Households opt for mutual assistance in the new normal

About 55% of the households refuse any kind of technical assistance

since they have no permanent damage due to COVID-19. Forty-five

per cent of households are expecting some type of advice for their

betterment and thus government intervention is important. Formal

or informal organizations, which are called social capital formation,

play an important role in disaster situations like the COVID-19

outbreak. Therefore, 78% of the households have opted to form

such an organization in the neighbourhood for mutual assistance

among communities.

Credit card

outstanding balances,

borrowings and

procrastinated leasing

instalments have

considerably

increased.

The proposed debt

moratorium cannot

provide concrete

solution for financial

difficulties.


xxiv



The COVID-19 encumbers on MSMEs

The events and activities related to production and employment of

most of MSMEs are significantly hit by the COVID-19 pandemic.

Approximately 80% of enterprises were exposed to suffer a

production and employment drop. More than 80% of the MSMEs

declined their sales due to delayed or cancelled orders by domestic

and foreign buyers. The most severely affected enterprises were the

"accommodation and foodservice sector” which is the major part of

the tourism industry. Approximately 10% of MSMEs in the apparel

and textiles industry in Sri Lanka have shifted their production

towards protective clothing such as face masks under the pandemic

environment. Nearly 15% of MSMEs have benefited under the

current crisis. Retail and wholesale trade, Ayuravedic medicine

activities, and computer sales have been continuing their business

without a significant drop in sales. To overcome the current sluggish

situation, the government and other responsible institutions should

initiate a sound policy guidance.

Far-reaching consequences on Sri Lanka’s stock market

The COVID-19 pandemic has kept investors in suspense since

February, placing markets in high levels of volatility, divestments,

and flight into “safer haven assets”. Similar to other economies,

uncertainty over economic slowdown in Sri Lanka, led to a sell-off in

the financial market and capital outflows. Market analysts expect

this situation to continue until the market settles down as both local

and foreign investors are looking at exiting from risky assets due to

the global pandemic. The foreign investors must have taken into

consideration the fact that Sri Lanka has been downgraded by

international credit rating agencies as well. Despite the foreign

selling pressure, the CSE turned up and showed a little improvement

after 12th May. This implies that investor sentiments are becoming

positive gradually.

The gloomy prediction on textiles and garment sector

The textiles and garment industry recorded USD 5.6 billion of export

earnings in 2019. The estimated losses for the 3 months’ period

from 15th March to 15th May round up to USD 1,400 million. The

most alarming signal is that 45% of the Sri Lankan export market

depends on the USA, which is the most COVID-19 affected country in

Despite the foreign

selling pressure, the

CSE turned up and

showed a little

improvement after

12th May. This implies

that investor

sentiments are

becoming positive

gradually



University of Ruhuna, Matara, Sri Lanka xxv

the world, followed by UK (14%), Italy (8%), Germany (6%), the

second most severely the COVID-19-hit countries. Demand

contractions could result in a reduction of apparel exports by an

additional 30 - 40% after June, due to mass cancellations of orders

by buyers and problems in the purchasing of necessary raw

materials. These circumstances, coupled with delayed shipments,

forced discounts, and currency depreciation, have led to working

capital problems across the industry.

The COVID-19 threatened the construction sector

The construction sector was already suffering from delayed

payments for government financed projects and lower demand for

high-end condominium developments. On this backdrop the

construction sector would face constraints in meeting contractual

agreements on completion dates and costs. While the labour and

related issues would also affect the performance of the construction

sector in the short run due to health standards, raw material-related

issues are also expected with the imposition of import controls. In

order to re-energize the construction sector, measures to pay off

already delayed payments for completed projects and carefully

crafted policies to address the aforementioned issues are timely

important.

The COVID-19 limits consumption

The consumer goods sales volume of large-scale institutions crashed

while the medium and small-scale businesses were willing to

normalize within several weeks after the lifting of the curfew. The

production capacity dropped by 50% as a result of the working from

home concept. The supply chain and the reinvestments of the

industry are at risk because of the profit loss and shrinking cash

flows. The changing lifestyles and income levels sharply affected the

consumer goods industry. The industry has to find new ways to

reach the customer in a more efficient manner.

Travel and tourism in Sri Lanka hit the ground

Travel bans, mobility restrictions, lockdowns and border closures

disrupted global travel with the pandemic outbreak. Sri Lanka’s

tourism was also significantly affected. Tourist arrivals reached

bottom line. The expected loss of revenue is more than USD 300

billion. Zero income resulted in the layoff of temporary and casual

Reduction of apparel

exports by an

additional 30 - 40% is

expected after June.

The changing

lifestyles and income

levels sharply affected

the consumer goods

industry.


xxvi



employees, while permanent employees are also in high risk of job

loss with the current salary freeze. Approximately 20% of indirect

employees lost their earning sources. Zero income created a

financial distress to investors who were trapped by indebtedness

despite the loan moratorium granted for a few months. Investors

are likely to leave the industry though there are no threats on

mortgaged property to foreclose. Stakeholders will indeed be

relieved in 2021 if there are no more disasters. Regaining tourism

entirely depends on the source markets’ recovery and on the safety

brand of Sri Lanka. Thus, Sri Lanka has to harness new avenues in

tourism.

The COVID-19 weakened already-fragile fiscal position

With recent amendments in the tax laws the exact impacts of the

COVID-19 economic shock on revenue collection must be studied

carefully. The real impact of the pandemic will be seen towards the

end of the fiscal year as indicated in distribution of tax collection

during a year. All in all, the as far as the fiscal policy is concerned,

prolonged fiscal deficit is highly likely to further escalate during the

year. Thus, the greatest challenge in financing this deficit is not to

crowd out the private investment which will cost the future

economic growth in the country on one hand, and one other hand,

not to expand external financing to an unmanageable level, which

will risk both future growth and the sovereignty of the country.

Standard and Fitch ratings downgraded Sri Lanka sovereign credit

ratings to B-. This would weaken Sri Lanka’s already-fragile fiscal

position as the credit facilities will be tightened by international

sources.

Government relief package kept the aggregate demand

from sinking

The fiscal position of the government has weakened following the

unexpected allocations for health facilities, imposing price ceilings

for essential food items, relief funds, strengthening social nets and

doubling household transfer payments during the lockdown.

Household transfers which account for 18% of recurrent expenditure

for a normal fiscal year, would have increased by nearly 2% this year.

During the COVID-19 pandemic period, tax collection delayed. As a

solution to the liquidity problem, the government continued printing

money in substantial amounts. For the two months ending 30th April

Travel and tourism in

Sri Lanka is bad

affected.

Approximately 20% of

indirect employees

entirely lost their

earning sources.

Zero income of

tourism created a

financial distress to

investors who were

trapped by

indebtedness despite

the loan moratorium

granted.



University of Ruhuna, Matara, Sri Lanka xxvii

2020, the government has printed money more than LKR 200 billion,

threatening price stability of the country. However, this helped a lot

in sustaining the aggregate demand at the required level to keep the

economy on the move in a distress situation where the vast majority

has lost their income sources.

Banking and finance sector at a risk of increasing NPLs

On the one hand, while the assets quality of the banking sector is

expected to go down, the demand for credit will also go down, as

almost all leading sectors are confronted by the pandemic. On the

other hand, Non-Performing Loans (NPLs) are expected to go up in

the short and medium terms, which can be risky. Even though

various regulatory measures have already been taken by the Central

Bank to give a positive shock to economic activities, the

effectiveness of such policies in reaching the expected outcomes is

questionable. Moreover, the most recent policy directions issued by

the Central Bank show that they are yet to address the real issue in

the system. Therefore, to reach the benefits of the revival policies

while ensuring the soundness of the financial system, it is expected

to face the trade-off between economic growth and price stability.

The most recent

policy directions

issued by the Central

Bank show that they

are only cushions yet

to address the real

issue in the system.

The economic impact of the COVID-19 pandemic in Sri Lanka

xxviii




1

CHAPTER I

METHODOLOGICAL APPROACH TO THE RESEARCH

Chapter I The economic impact of the COVID-19 pandemic in Sri Lanka

2


University of Ruhuna, Matara, Sri Lanka

Methodological Approach to the Research

1.1. Introduction

This section of the report briefly presents the methodological

approach to this research report. A traditional/academic approach

has not been followed here since this a report rather than an

academic research activity. However, research objectives, research

hypotheses, research design, data collection and analysis procedures

and ethical considerations are explained under this section.

1.2. Objectives and scope of the study

The procedures of data collection and analysis are entirely

depending on the research objectives and thus core and specific

objectives are given below.

Main objective

It is obvious that all the economies affected by the COVID-19 and

the assessment of the impact of the pandemic that quantify the

likely magnitudes of the effects must be evaluated within a range of

scenarios for the formation of policy strategies for regaining the

economies from the pandemic. Accordingly, the primary objective of

this study is to investigate and assess the immediate economic

impacts of the COVID-19 on Sri Lankan economy.

Specific objectives

The COVID-19 outbreak has an unprecedented effect on the entire

economic activities in Sri Lanka. As a result of the temporary decline

of household consumption, a sharp but impermanent decline in

domestic consumption and investment can be observed. The

outbreak affected directly on future business activities, including

collapse of tourism and business travel; spill overs of weaker

demand on other sectors and economies through trade and

production linkages, supply side disruptions to production and trade

and effects on healthcare spending. Further, the Government of Sri

Lanka has provided relief packages that include allowances to low

income and vulnerable families as well as individuals, suspension of

The primary objective

of this study is to

investigate and assess

the immediate

economic impacts of

the COVID-19 on Sri

Lankan economy.



University of Ruhuna, Matara, Sri Lanka 3

lease and debt moratorium, extension on utility bill payments. The

following specific objectives have been established by considering all

these aspects,

• to investigate the COVID-19 impact on various economic

activities in Sri Lankan households

• to investigate the COVID-19 impact on selected major

economic sectors in the Sri Lankan economy

• to suggest appropriate policy measures and a plan of action

for regaining Sri Lankan economy in the post-COVID-19 time

horizon

Therefore, the study aimed at investigating the economic impacts of

the COVID-19 amalgamating both quantitative and qualitative

approaches to achieve the objectives of the study. Despite

uncertainty surrounding some of this study’s estimates and analysis,

they are useful for policymakers to better understand the impacts of

the COVID-19 outbreak for socio-economic development and

performance, allowing them to plan ahead and identify devise

strategies for more resilience to the COVID-19 impacts on the

economy.

1.3. Research hypothesis

1. The COVID-19 pandemic has created many negative effects

on diverse economic activities in Sri Lankan households.

2. The COVID-19 pandemic adversely affected the many facets

of the Sri Lankan economy.

1.4. Research design

Methodological approach

The research was designed amalgamating both inductive and deductive

approaches in order to suit the research objectives. Deductive approach is

used to describe a method of reasoning where conclusions are deduced

logically from other things that are already known. A deductive approach

to research is the one that researchers typically associate with scientific

investigation. The researcher studies what others have done, reads

existing theories of whatever phenomenon it is studying, and then tests

hypotheses that emerge from those theories. A deductive approach allows

to test the relationships or links on more general circumstances (Bernard,

2011).

Both quantitative and

qualitative

approaches were

employed to achieve

the objectives of the

study.


4



Inductive reasoning starts with the observations and theories that

are proposed towards the end of the research process as a result of

observations (Goddard & Melville, 2004). Inductive research

“involves the search for pattern from observation and the

development of explanations – theories – for those patterns through

series of hypotheses” (Bernard, 2011). No theories or hypotheses

would apply in inductive studies at the beginning of the research and

the researcher is free in terms of altering the direction for the study

after the research process has commenced.

Philosophical approach

Ontological view

Philosophically, ontology is a doctrine of the objective reality on the

whole. But it is only one definition; the second one treats ontology

as a theoretical construct of the explored reality. These

interpretations are equally important for analysis of ontology and

ontological problems in any science. In economics, these two

interpretations are also applied. Economic ontology is a notion of

the part (or aspect) of reality, analysis by economists, or a notion

designating the economic view on the reality. There are two

positions that are referred to as objectivism and constructionism

respectively (Bryman & Bell, 2007). Objectivism exists whether

human beings are there to observe it or not. On the other hand,

there is a real world "out there" which exists independently of our

senses. In this research, the ontological consideration is objectivism.

Epistemological view

Social sciences - and within them economics and management and

organizational sciences in particular - are living a great and renewed

interest for its epistemological and methodological statutes, as

witnessed by many books and specialized journals which flourished

during the last two decades (Lucio, Biggiero et al., 2016).

Epistemology in a business research, as a branch of philosophy,

deals with the sources of knowledge. Specifically, epistemology is

concerned with possibilities, nature, sources and limitations of

knowledge in the field of study. Alternatively, epistemology can be

branded as the study of the criteria by which the researcher

classifies what does and does not constitute knowledge (Goddard &

Melville, 2004). According to Bryman & Bell (2007), there are two

positions mentioned as positivism and interpretivism respectively. It

Economic ontology is

a notion of the part

(or aspect) of reality,

analysis by

economists, or a

notion designating

the economic view on

the reality.




is common in the quantitative research design that the researcher

tries to be neutral to the objectives of the study. The positivism

paradigm is employed for the current study in order to resolve the

research problems as guided by the kind of data and information

available for the research.

Research strategy

According to Saunders et al. (2009), research strategy is always

related to the ontology and epistemology of the study, and it takes

into account the purposes of the research, the access of data and

the restraints that may affect the process of the research.

Quantitative research and qualitative research can be construed as

different research strategies, which represent a useful means of

classifying different methods of social science research. In this study,

the deductive approach was primarily employed as quantitative data

were used extensively to achieve the research objectives. In

quantitative data analysis it was expected to turn raw numbers into

meaningful data through the application of rational and critical

thinking. Quantitative data analysis also includes the calculation of

frequencies of variables and the differences between variables.

One of the objectives of this research was to obtain the views of

practitioners of diverse sectors of the economy. In such case the

quantitative strategy alone would not have been beneficial to the

researchers to accommodate the third party’s views of the COVID-19

impact on different sectors of the economy and thus some

qualitative strategies were also employed. Content and Narrative

Analysis were employed in the context of qualitative data analysis.

1.5. Data collection procedures

The impact of the COVID-19 has strongly affected every part of the

economy and thus, all dimensions of the economy must be studied

to understand the effect of the COVID-19. Therefore, both primary

and secondary data were collected for this research to provide a

meaningful conclusion. Since this research was a rapid assessment

of the COVID-19 impact and the entire country was locked down

during the research period, the online questionnaire method and in-

depth interviews by means of telephone interviews were conducted

for gathering of the relevant primary data. A Google form was

created on the Google free platform for questionnaire surveys.

Since this research

was a rapid

assessment of the

COVID-19 impact and

the entire country

was in ‘locked down’

while the research

was conducted, the

online questionnaire

method and in-depth

interviews by means

of telephone

interviews were

conducted.


6



Forty-three questions were included in the questionnaire and it was

administered online. The questionnaire was distributed using email

addresses that were collected by the research team using different

sources and public relations. A sample of 1500 households was

chosen and finally 1087 usable responses were received covering 22

administrative districts in Sri Lanka. The reference period for the

data collection was from 20th April 2020 to 20th May 2020.

The experts and practitioners in different sectors of the economy

were interviewed by the research team and their views were

accommodated for the analysis in terms of narrative analysis.

Standard guidelines were adopted for interviews.

A discussion of the impact of the pandemic must be comparative

and hence researchers were encouraged to use the secondary data

sources as well. The Central Bank of Sri Lanka, the Tourism

Development Board, the Chamber of Commerce and available online

reports were the secondary data sources utilized.

1.6 Results and discussions

All responses were analysed using different kinds of charts and

graphs with supportive frequency tables. Most of the findings were

illustrated in pictorial form for better understanding of the wide-

ranging audience.

1.7 Ethical considerations

Ethical consideration is one of the important parts of a research.

Research ethics are generally known as the set of ethics that govern

how scientific and other research is performed at research

institutions such as universities, and how it is disseminated (Resnick,

2015). At the core, these ethical principles points out the need to (a)

do good (b) do no harm. In practice, a researcher needs to (a) obtain

informed consent from potential research participants; (b) minimize

the risk of harm to participants; (c) protect their anonymity and

confidentiality; (d) avoid using deceptive practices; and (e) give

participants the right to withdraw from his/her research. All these

ethical considerations were practised honestly within the research

process since this research study was entirely on human attitude

and their behaviour.

The experts and

practitioners in

different sectors of

the economy were

interviewed by the

research team and

their views were

accommodated for

the analysis.




1.8 Chapter summary

This chapter briefly provided the methodology adopted for the

research. The main objective of the research was to investigate the

COVID-19 impact on the Sri Lankan economy as a whole and on

individual households. Philosophically, the ontological consideration

is objectivism and the positivism paradigm was employed for the

current study in order to resolve the research problems as guided by

the kind of data and information available for the research. The use

of the quantitative strategy would not benefit the researchers to

accommodate the third party’s views of the COVID-19 impact on

different sectors of the economy and thus some qualitative

strategies were also employed. Content and narrative analysis were

employed in the context of qualitative data analysis. Primary and

secondary data were employed for the analysis and ethical

considerations, which totally adhered to the process of data

collection.

Philosophically, the

ontological

consideration is

objectivism and the

positivism paradigm

was employed for the

current study in order

to resolve the

research problems.


8




9

CHAPTER II

THE ECONOMIC BACKGROUND OF SRI LANKA BEFORE THE COVID-19 PANDEMIC

Chapter II The economic impact of the COVID-19 pandemic in Sri Lanka

10



The Economic Background of Sri Lanka before the COVID-19 Pandemic

2.1. Introduction

This chapter provides the reader with the salient features of the Sri

Lankan economy before the COVID-19 pandemic. It covers major

economic activities and their performance in the recent past.

2.2. Sri Lanka at a glance

The island of Sri Lanka (the Democratic Socialist Republic of Sri

Lanka), is located 54 km off South India and between the Far and

Near East, adjacent to one of the world’s busiest shipping routes.

The country has a tropical climate and occupies an area of 65,610

square kilometres, including inland water resources. The

geographical shaping of the country helps the alternative power

generations such as solar, hydro and wind. Sri Lanka upgraded to the

upper middle income country status as per the World Bank

classification of countries published in July 2019 and within a short

period of time it was downgraded to a lower-middle-income group

in July 2020 under the World Bank new country classification (World

Bank, 2020). Sri Lankan inhabitants (22 million) have achieved

substantial gains in reaching several of the Millennium Development

Goals [MDGs]. For example, at the end of the study period, the

island has achieved a high literacy rate (92.5% at age of 5 years and

above) and educational level, good longevity (72 years for male and

78.6 years for female), and a low rate of population growth (1.1%).

Although government health expenditures as a percentage of GDP

for Sri Lanka was relatively low (in 2019, 1.6% of the Gross Domestic

Product (GDP), health indicators in the country are the best among

other nations in South Asia and quite good from an international

perspective . By the end of 2018, the Human Development Index

(HDI) of the country stood at 0.780 and rank at 71 among 189

countries. The Overall Poverty Headcount Ratio (PHCR) was

relatively low (4.1%) (CBSL, 2019). By contrast to these positive

trends of some indicators, however, it can be estimated that

Sri Lanka has

recorded 1.6 per cent

of negative economic

growth rate for the

first Quarter of 2020.

Sri Lanka was

downgraded to a

lower-middle-income

group in July 2020

under the World Bank

new country

classification.




approximately 23% of the population face income or consumption

poverty, since 33% of Sri Lankan households are receiving Samurdhi

benefits.

As regards the socio-demographic pattern of the society, the ethnic

composition indicates that 74% of the total population in Sri Lanka is

Sinhalese, 15% Tamil and 9% Moors and Malays. Sector-wise, 77.4%

of the population lives in rural areas, 18.2% in urban and rest of

4.4% in the Estate sector (CBSL, 2019). The major religions are

Buddhism (70%), Hinduism (13%), Islam (9%), and Christianity (7%).

The Thirteenth amendment to the Constitution was introduced in

1987. It stated that, “the official language of Sri Lanka is Sinhala”

while “Tamil shall also be an official language,” with English as a “link

language”. Most official government functions are carried out in

three languages, while Sri Lankan airline is probably the only

international carrier that uses Tamil as one of its languages. In

Parliament, legislators may make speeches in Sinhalese, Tamil or

English.

2.3 The five major economic booms

From the economic perspective, the growth pattern of

independence in Sri Lanka consists of five major economic booms

together with four trough of recessions. The First economic boom

was in the period between 1965 and 1968. Among others two

factors: boom in production (agriculture, manufacturing and

construction) and increase of domestic consumption largely

contributed to this favourable trend. It followed by a trough in 1971

as the result of the Janatha Vimukthi Peramuna (JVP) insurrection

and decline in the performance of domestic agriculture and

construction sectors.

The second economic boom was marked in 1977-1978. It is called

the post-liberalization boom and followed by a trough of recession

in 1987 which resulted in a single factor that was the second wave of

the JVP insurrection. The third economic boom in the business cycle

in Sri Lanka marked in 1990 as a result of initiating the second wave

of liberalization. The single-most important constraint to economic

growth in the last two decades of 20th century was armed conflict

which continued since 1983. As estimated by the Central Bank of Sri

Lanka, the conflict has reduced economic growth by two to three

per cent and has diverted public resources away from economic

From the economic

perspective, the

growth pattern of

independence in Sri

Lanka consists of five

major economic

booms together with

four trough of

recessions.


12



reform. Despite the brutal civil war since 1983, the economic growth

of the next two decades has averaged around 4.5%. In 2001,

however, GDP growth was negative (-2%). (The only contraction

since independence). Global recession, slowdown in agriculture and

hydropower generation and high domestic food price due to

drought and terrorist attacks are the contributing factors to the

economic recession in 2001. However, regaining the pre-economic

situation, a 4.0% growth rate was recorded in 2002.

In the fourth boom, the economy grew more rapidly after 2002 due

to the Norwegian-mediated Ceasefire Agreement between the

Government of Sri Lanka (GoSL) and the Liberation Tigers of Tamil

Elam (LTTE) and subsequent economic reforms (2002-2006),

recording a growth rate of 6.0% in 2003 and 5.4% in 2004. The

economic situation in Sri Lanka in 2006 was stable, despite the two

cautious external shocks: resumption of hostilities between the

government and the LTTE and escalating oil and food prices in the

world market. The GDP growth in 2006 remained strong at 7.4%.

The GDP grew in the first half of 2007 at an annual rate of 6.2%. The

per capita income in 2006 was also high at USD 1,355. The figure

was the highest in South Asia after the Maldives (MHHDC, 2007).

The economy again reached a trough of recession in 2009 due to a

number of reasons such as higher military expenditure and

drawback in agriculture due to adverse weather conditions.

Finally, the post-conflict (between the GoSL and LTTE) boom marked

2010-2012. Sri Lanka is continually experiencing an economic

recession since 2013 as a result of external shocks such as negative

growth of agriculture due to prolonged drought, rapid capital flight

responding to tight global financial conditions and sharp

depreciation of the Sri Lankan Rupee, slowdown in industrial

activities, the Easter Sunday attacks in 2019 and weak growth of

credit to the private sector in 2019 (CBSL 2019). According to the

MTI Business Review of 2019 and Outlook for 2020, over 50% of the

surveyed CEOs and business leaders from Sri Lanka predicted the

economy would stabilize in the year 2020. With fairly favourable

predictions from the global arena, Sri Lankan industries and service

providers have also expressed optimism for the year 2020.

According to the MTI

Business Review of

2019 and Outlook for

2020, over 50% of the

surveyed CEOs and

business leaders from

Sri Lanka predicted

the economy would

stabilize in the year

2020.




2.4 Industry and the service sector performance

The service-sector is the largest component contributing at around

57% to the country’s GDP. In the recent past, the services-sector

continued its strong expansion, fuelled primarily by strong growth of

the sectors of insurance and financial services (7.5%),

telecommunication (6.4%), transport (6.3%) and trading (4.7%).

Public administration and defence expenditures increased due to

resumption of hostilities, expansion of public sector employment

including the Minister of Cabinet (9.6%). There is also a growing

trend of information technology (IT) sector (4.7%), especially

information technology training and software development (4.7%)

(Department of Census and Statistics, 2019).

However, the Easter Sunday attacks adversely affected on the

services sector activities slowed down to 2.3% in value added terms

in 2019, recording the lowest growth in nearly five years, down from

4.6% in 2018. The impact of the attacks mainly extended to tourism

related services, including accommodation, transportation,

wholesale and retail trade activities, and other personal services.

Meanwhile, financial services, real estate, public administration,

telecommunications, insurance, education, professional services,

human health and IT programming consultancy and related services

expanded during the year (CBSL 2019).

On annual average basis, the industrial sector accounted for 27.5%

of the GDP for the period from 2010 to 2018. Sub-sector-wise,

manufacturing was the largest contributor, accounting for 17.5% of

the total industrial output. Within the sector, food, beverages, and

tobacco contributes the largest share (6.6%) and followed by textile,

apparel, and leather products sub-category by 4.9% for period. The

construction sector accounts for 6.7% of the GDP while the mining

and quarrying accounts for 2.4% of the GDP.

The industrial production of the manufacturing sector for the fourth

quarter of 2019 has increased by 0.7 % compared to the same

quarter in 2018. Among the manufacturing industries; volume of

products of ‘Manufacture of chemicals & chemical products’ has

shown a remarkable increase (22.5%) in production during the

fourth quarter of 2019, compared to fourth quarter in 2018 and

volume of products of ‘Tobacco products’ (17.5%), which reported a

The industrial

production of the

manufacturing sector

for the fourth quarter

of 2019 has increased

by 0.7 % compared to

the same quarter in

2018.


14



decrease during this period (Department of Census and Statistics,

2019).

Agriculture has lost its relative importance in the Sri Lankan

economy in recent decades. Although the sector has been

employing just about 33% of the working population, it contributes

to only about 8% of the GDP. Rice, the staple cereal, is cultivated

extensively in the subsistence agricultural sector. The plantation

sector consists of tea, rubber, and coconut. In recent years, the tea

crop has made significant contributions to export earnings (CBSL,

2019).

The unemployed population reported in 2019 is 411,318. Survey

reports that unemployment rates for male and female are 3.3% and

7.4%, respectively. Among all age groups, unemployment rates of

females are higher than those of males. Youth unemployment (age

15 – 24 years) rates are the highest for both sexes, compared to

other age groups. When level of education is considered the highest

unemployment rate (8.5%) reported from the G.C.E. (A/L) & above

group. It is 5.0% and 11.9% for male and female respectively.

Gender-wise, female unemployment rates are higher than those of

male as well as country percentages (Department of Census and

Statistics, 2019).

Sri Lanka has comparatively a well-developed financial system, even

better than other countries in the region. The formal financial

system in Sri Lanka consists of the five categories of financial

institutions regulated by the Central Bank of Sri Lanka. These include

banking institutions, deposit institutions, long-term lending

institutions, contractual savings institutions and other specialized

finance institutions.

At the end of 2019, the banking institutions comprise the Central

Bank itself, 26 Licensed Commercial Banks (consisting of 2 state

banks, 11 domestic private banks, and 13 foreign banks) and 6

Specialized Banking Institutions (including savings and development

banks and regional development banks).

Deposit Institutions include the National Savings Banks while the

Long-term Lending Institutions comprising a number of specialized

developments finance institutions such as the National Development

Bank, the Development Finance Corporation of Ceylon Bank, and the

State Mortgage Bank. Contractual savings institutions are the

Sri Lanka has

comparatively a well-

developed financial

system, even better

than other countries

in the region. The

formal financial

system in Sri Lanka

consists of the five

categories of financial

institutions.




Insurance Companies and Social Security Funds (Employee Provident

Fund and Employee Trust Fund). The other specialized financial

institutions comprise the Leasing Companies, Merchant Banks,

Venture Capital Companies, and Finance Companies.

In addition to these formal financial institutions, there is a

widespread network of semi-financial institutions within the

cooperative sector. These are not regulated or supervised by the

CBSL. These include the Cooperative Rural Banks (CRBs), and the

Thrift and Credit Cooperative Societies (TCCSs). Apart from these

cooperatives, a number of Savings and Credit Unions such as

Samurdhi Banking Societies (SBSs) and Non-Government

Organization companies such as the Sarvodaya Economic Enterprise

Development Services (SEEDS) are operating nationwide specializing

microfinance to the rural poor. These Rural Savings and Credit

Unions together with structured Financial Cooperatives complement

the regulated banking system.

Since 1990, considerable de-regulation of the banking system in the

country has been adopted under a series of reforms sponsored by

the World Bank and the International Monetary Fund (IMF). With

these reforms, heavy involvement of Central Bank in refinancing the

loans advanced by the commercial banks to priority sectors in the

past has been withdrawn, but a new series of reforms has been

adopted for strengthening the regulation and supervision of banks,

and bringing banking supervision into line with international

practices. Areas that have been strengthened under the reforms

include classification and provision of non-performing loans and

advances, capital adequacy requirements, and accounting and

auditing standards. Most exchange controls have also been

removed.

2.5 Changing of the development policies

From the perspective of development policies, in 1977, Sri Lanka

shifted away from the socialist-orientated inward-looking economic

policies to the package of export-oriented outward-looking policies

and opened its economy to free foreign trade and investment flows.

But the pace of reform has been uneven. For example, as observed

by the Government of Sri Lanka and the Millennium Challenge

Corporation (2017: p12):

Sri Lanka shifted away

from the socialist-

orientated inward-

looking economic

policies to the

package of export-

oriented outward-

looking policies and

opened its economy

to free foreign trade

and investment flows.


16



“Sri Lanka’s income inequality is severe, with striking

differences between rural and urban areas. About a

quarter of the country’s total population remains

impoverished. Civil conflict, falling agricultural labour

productivity, lack of income-earning opportunities for the

rural population, and poor infrastructure outside the

Western Province are impediments to poverty

reduction”.

Meanwhile, the declining trend in inflation observed for the period

from 2012 (7.54%) to 2015 (2.24%), reversed, starting in 2015 and

continued upto 2017 (6.58%). The inflation rate was 4.1% for 2019.

Most recent figures, for example, show a trend of declining inflation

and budget deficits (-5.5%) that resulted to macro-economic stability

in the economy. However, the budget deficit is equal to -6.8% of the

country’s gross domestic products in 2019. In 2019, growth of the

money supply accelerated and broad money expanded, reflecting

credit expansion (mainly to the government). The government debt

estimated as 86.8% of the GDP in December 2019. The weighted

prime lending rate fell from 12.2% in April to 9.2 in December in

2019.

Irrespective of the above trends, when compared to the East Asian

Newly Industrial Countries (Asian Tigers), the economic growth in Sri

Lanka is, however, relatively slow. Such a slow growth rate has been

attributed to two factors: the ethnic conflict that erupted in 1983

and the substantial involvement of the government in the economy.

Although the private sector appears to be growing with the

economic liberalization policies adopted since 1977, the State is still

heavily present in several key sectors including power, transport,

banking, agricultural input, and labour. For example, 14% of the

labour force is being employed by the government, representing

almost half of the formal employment in the economy.

In turning to the foreign trade sector, the exports consist of textiles

(51% by value); tea (14%); other agricultural products (6%);

machinery, mechanical and electrical equipment (6%); latex

products (4%); and diamonds and jewellery (4%). It reflects the fact

that Sri Lanka’s exports sector is largely concentrated on two

primary products: garments and tea. Garment exports face

increased competition after the 2005 expiration of the worldwide

Multi-fibre Arrangement. The tea industry was challenged by a

Most recent figures,

for example, show a

trend of declining

inflation and budget

deficits (-5.5%) that

resulted to macro-

economic stability in

the economy.




shortage of plantation labour and by growing competition. In 2019,

Sri Lanka recorded a total value of USD 16.4 billion of exports. Main

categories of exports are apparel, tea rubber, gems and jewellery.

In the services sector, the tourism industry of Sri Lanka closed in

2019 with total revenue of USD 3.6 billion. According to the Central

Bank of Sri Lanka, revenue from tourism slipped by 18% following

the Easter Sunday attack[s] and the tourist arrival was at 1.9 million

last year, against the 2.3 million arrivals and the USD 4.4 billion

revenue recorded last year. Sri Lanka’s ICT, BPM and

Telecommunications service sectors also recorded estimated export

revenue just above USD 1 billion while also recording a workforce

growth of 50% since 2014.

In 2019, Sri Lanka recorded a total value of USD 19.9 billion of

imports (mainly fuel 19%, textiles 14%, food 7%, machinery 12% and

vehicles 5%). The resulting large trade deficit was financed primarily

by foreign assistance, commercial borrowing, and by remittances

from Sri Lankan expatriate workers. In total, temporary migrants are

estimated to number 1.9 million: almost 23% of the labour force.

A majority are women working as housemaids and are an important

source of foreign exchange for Sri Lanka, well ahead of apparel (USD

5 billion), tourism (USD 4.4 billion) and agricultural exports (USD 2.7

billion of which tea was USD 1.5billion). The net inflow of foreign

private remittances by 1.2 million Sri Lankan residing abroad

amounts currently to 7.9% of the GDP, and is important in balancing

the net trade and payments deficits. The workers’ remittances

recorded a decline of 4.3 %, amounting to 6.7 billion USD in 2019

compared to 7 billion USD in 2018.

Obviously, Sri Lanka depends on a continued strong global economy

for investment and for expansion of its export base. The government

plans an ambitious infrastructure development programme to boost

growth. It hopes to diversify export products and destinations to

make use of the Indo-Lanka and Pakistan-Sri Lanka Free Trade

Agreements, the General System of Preference GSP+), treatment by

the European Union (EU) and other regional and bilateral

Preferential Trading Agreements.

Sri Lanka's most important exports market is the United States. It

was estimated to be around USD 2.1 billion in 2017, or 25% of total

exports. For many years, the United States has been Sri Lanka's

Large trade deficit

was financed

primarily by foreign

assistance,

commercial

borrowing, and by

remittances from Sri

Lankan expatriate

workers.


18



biggest market for garments, taking almost 60% of the total garment

exports. The top import origins are India (USD 4.5 billion), China

(USD 4.2 billion), Singapore (USD1.3 billion), the United Arab

Emirates (USD 1.6 billion) and Japan (USD 1.02 billion). India is Sri

Lanka's largest supplier, accounting for 22% of imports valued at

over USD 4 billion. United States exports to Sri Lanka are estimated

to be around USD 813.6 million in 2017, consisting primarily of

textiles and specialized fabrics, tobacco, newsprint, food and

beverages, chemicals, synthetic rubber-primary, electrical

apparatus, telecommunications equipment, computers and

accessories, and industrial supplies (United Nations, 2019).

2.6 The progress of foreign policy and foreign aid

From the foreign policy point of view, Sri Lanka traditionally

followed a non-aligned foreign policy. Sri Lanka was a founding

member of the Non-Aligned Movement (NAM), but has been

seeking closer relations with the United States since December 2001

to 2006 and with China and India since 2006. It participates in

multilateral diplomacy, particularly at the United Nations, where it

seeks to promote sovereignty, independence, and development in

the developing World. It also is a member of the Commonwealth,

the South Asian Association for Regional Cooperation (SAARC), the

World Bank, the International Monetary Fund, the Asian

Development Bank, and the Colombo Plan. Sri Lanka continues its

active participation in the NAM, while also stressing the importance

it places on regionalism by playing an active role in the SAARC.

Sri Lanka is heavily dependent on foreign assistance, with the World

Bank, the Asian Development Bank, Japan, and other donors

disbursing loans amounting USD 912 million in 2006. Foreign grants

amounted to USD 301 million in 2006. While implementation of aid

projects has been spotty over the years, the government is trying to

improve this record by streamlining tender processes and increasing

project management skills. The Asian Development Bank (ADB), the

World Bank (WB), Japan and the United Nations Development

Programme (UNDP) are the largest donors of aid to the country. The

United States Agency for International Development (USAID) is the

lead donor working on competitiveness at the industry cluster level

Sri Lanka traditionally

followed a non-

aligned foreign policy.

The island was a

founding member of

the Non-Aligned

Movement (NAM, but

has been seeking

closer relations with

the United States,

China and India.




and developing policy reform through the private sector (United

Nations, 2019).

Major donors supporting key infrastructure improvements are

Japan, the World Bank (WB) and the Asian Development Bank (ADB).

The government of Sri Lanka receives funding from the WB and ADB

for macro-economic reforms, including privatization of the

plantation industries and telecommunications. In the area of legal

and judicial reform, a WB loan will improve court infrastructure,

administration and commercial law reforms. USAID humanitarian

activities complement efforts of UN agencies such as the UNICEF the

World Health Organization (WHO), The United Nations High

Commissioner for Refugees (UNHCR) and international voluntary

organizations, which are provided health care and shelter to the

displaced.

According to the ADB’s Country Operations Business Plan (COBP) for

the years 2020 - 22, the proposed lending program for Sri Lanka for

the 3-year period is estimated at USD 2.46 billion. The programme is

expected to focus heavily on the development of transport

infrastructure.

From the policy-making point of view, the government has recently

[2007] published a paper, "Creating Our Future, Building Our

Nation". The paper suggests a less interventionist role of the

government and includes a focus on reducing poverty through rural

economic development, promoting small and medium enterprise,

restructuring state-owned enterprises, having a smaller budget

deficit, and promoting better civil services.

It is believed that the future of Sri Lanka's economic health,

however, primarily depends on political stability, return to peace,

and continued policy reforms--particularly in the area of fiscal

discipline and budget management. Rising oil costs and the 24-year

conflict have contributed to Sri Lanka's heavy public debt load (90%

of GDP in 2007). Sri Lanka needs economic growth rates of 7% to 8%

and investment levels of about 30% of GDP for a sustainable

reduction in unemployment and poverty. In the past 10 years,

investment levels have averaged around 25% of GDP. Domestic

investment seen in areas like tourism and information and

communications technology (ICT) will need to be complemented by

increased foreign investment, as well as increased private

investment in export sectors.

It is believed that the

future of Sri Lanka's

economic health

primarily depends on

political stability,

return to peace, and

continued policy

reforms in the area of

fiscal discipline and

budget management.


20



2.7 Sri Lanka just before the COVID-19

According to a Central Bank report issued on April 29, 2019, Sri

Lanka’s foreign debt is more than USD 55 billion. Global ratings

agencies such as Fitch and Moody’s have delivered dire warnings:

Moody’s cited capital outflows, the devaluation of the rupee and

low reserves in the face of large external debt service payments. It

said the country has “very weak debt affordability.” It is expected

“Sri Lanka’s debt burden to rise to nearly 100% of GDP (gross

domestic product)” (Gunadasa, 2020).

Morgan Stanley, a global investment bank, rated the sovereign

bonds of crisis-ridden Pakistan and Ghana as better than Sri Lanka’s,

making it more challenging for government borrowings. Similarly, on

April 24, Fitch Ratings downgraded Sri Lanka’s sovereign rating from

B to B-, predicting the “economic shock from the COVID-19 would

further erode rising public and external debt sustainability.” Analysts

warned that the printing of more money by the Central Bank could

further downgrade the index (Gunadasa, 2020).

Fitch added that it was difficult for Sri Lanka to raise funds from

international financial markets to repay debt and the country had to

look for alternative sources. This difficulty was evident recently.

When the country offered USD 60 million worth of bonds last week,

only USD 28 million was raised. In the remaining months of this year,

the government will have to pay USD 3.2 billion for loans and

interest, followed by USD 13.8 billion for debt service from 2021 to

2023.

Sri Lanka’s economic freedom score is 57.4, making its economy the

112th freest in the 2020 index. Its overall score has increased by 1.0

point due to a higher fiscal health score. However, its overall score is

well below the regional (61.1) and World averages (61.6).

(https://www.heritage.org/index).

Sri Lanka ranks 93rd out of 180 countries on the Corruption

Perceptions Index (CPI) which was launched by Transparency

International Sri Lanka in June, 2019. The Latest data shows a score

of 38 not changed since 2017. Sri Lanka has changed its rank from 89

in 2018 to 93 last year. Campaign financing regulations could help to

increase Sri Lanka’s rank.

The economic

situation of Sri Lanka

before the COVID-19

was not healthier and

vulnerable to the

external shocks and

are in the recession

era.




It is clear that the economic situation of Sri Lanka before the COVID-

19 was not healthier and vulnerable to the external shocks and are

in the recession era. It was demanding a wider range of reforms on

the economy to take it in to the sustainable growth path. In this

effort, policy makers should pay attention to internal stability

through strengthening fiscal consolidation, improve tax collection

efforts and adopt prudent monetary and exchange rate policies,

rationalize wasteful expenditure with precise targeting of poverty

welfare programmes, promote sustainable agriculture and address

persistent poverty in the rural sector, minimize corruption by

promoting transparency and accountability, improve Doing Business

indicators. Meanwhile, it is necessary to increase export earnings

and FDI flows to achieve external stability and to manage high levels

of debt to achieve macroeconomic balance. With this social,

economic, political and environmental background in the country,

investigation of the socio-economic impact of the COVID-19 is more

important, from a policy point of view in the country.

2.8 Chapter summary

Sri Lanka is a lower-middle-income country with a GDP per capita of

USD 4,030 (2019) as per the World Bank country classification

released on 1st July 2020 (World Bank, 2020). Following the 30 years

of the North-East civil war, the economy grew at an average 5.6 %

during the period of 2010 - 2019, reflecting a peace dividend and

policy thrust towards reconstruction and growth. Growth is

estimated to have been 2.6 % in 2019, partly explained by the April

Easter Sunday attack[s] and the political instability.

The Sri Lankan economy is transitioning from a predominantly rural

agro-based economy towards a more urbanized market-oriented

economy driven by manufacturing and services. The service sector is

now dominating the economy while the agriculture sector is

shrinking. Social indicators related to education and health rank

among the highest in South Asia and are comparable even with

developed countries. During the last two decades, the economic

growth has translated into a downturn in the national poverty

headcount ratio significantly declining from 15.3% in 2006/07 to

4.1% in 2016. Unemployment is a rural phenomenon and a relatively

large portion of the rural population subsists on slightly more than

the national poverty line. Low tax revenues combined with largely

Sri Lanka is a lower-

middle-income

country with a GDP

per capita of USD

4,030.

The Sri Lankan

economy is

transitioning from a

predominantly rural

agro-based economy

towards a more

urbanized market-

oriented economy

driven by

manufacturing and

services.


22



non-flexible recurrent expenditure in salary bills, household

transfers, and interest payments of public debts have crowded out

crucial development spending on health, education and social

wellbeing. A public debt level exceeding 78% of the GDP is high

while the realization of foreign direct investment is fairly weak.

23

CHAPTER III

The COVID-19 IMPACTS ON HOUSEHOLDS IN SRI LANKA WITH SPECIAL REFERENCE TO THE SOUTHERN PROVINCE

Chapter III The economic impact of the COVID-19 pandemic in Sri Lanka

24



The COVID-19 Impacts on Households in Sri Lanka with Special Reference to the Southern Province

3.1 Introduction

It has witnessed that more than 200 countries in the world have

already been affected by the COVID-19 pandemic directly and

indirectly. The outbreak of the COVID-19 severely affected Asian

countries and Sri Lanka is no exception, since the economic activities

of the country are interrelated with global economy through

international trade. The impact of the pandemic was blew through

the whole economy just before and after the lockdown of the

country. The ongoing health pandemic severely affected economic

conditions of different layers of the household economy. This was

further worsening the livelihood of individuals and families in the

country due to initiated government restrictions and regulations

such as social distancing. This section of the report investigate issues

related to household economic activities due to the COVID-19

pandemic.

It is apparent that direct health impacts are substantially low on

households in Sri Lanka, with compared to other regions of the

world. There were 2770 confirmed cases, 653 active cases in

hospitals with 11 deaths while 2106 recovered and discharged from

hospitals as of 26th July 2020 in Sri Lanka (Health Promotion Bureau,

2020). However, almost all the households were more or less

economically affected after the imposing of the lockdown of the

country with continued nationwide curfew regulations. Therefore,

there is an urgent need to assess the economic impact of the COVID-

19 on Sri Lankan households to mitigate the economic impacts of

the crisis in terms of those well-off as to household conditions.

Accordingly, the Department of Economics of the University of

Ruhuna, under the guidance of university authorities, conducted a

rapid household survey. The survey was implemented between 20th

There were 1884

confirmed COVID-19

affected cases and

621 active cases in

hospitals with 11

deaths while 1252

recovered and

discharged from

hospitals as of 14th

June 2020 in Sri Lanka




April 2020 and 20th May 2020. Statistics convert data into

information and this section presents such analytical results of the

household survey.

3.2 Analysis of the sample information

District-wise percentage distribution of households

This report is based on a sample of 1087 respondents covering 22

districts in the country. A structured questionnaire was administered

to collect information online. A link of a google form was sent to the

respondents through email addresses collected for this task. Figure

3.1 illustrates the percentage distribution of households throughout

22 districts in Sri Lanka. Therefore, the findings of this research can

be generalized to the Sri Lankan society as a whole. By covering 22

districts of the country the survey has used a representative sample

of households for the study. It is apparent that the survey has given

more emphasis on the Southern Province since the share of

households from the districts of Galle, Matara and Hambantota

accounted for, 32% of the total households surveyed.

Figure 3.1: District-wise percentage distribution of households in

the sample

The survey has given

more emphasis on the

Southern Province

since the share of

households from the

districts of Galle,

Matara and

Hambantota

accounted for, 32% of

the total households

surveyed.


26



Figure 3.2: Civil status of the respondents

Individual characteristics of respondents are significant in social

science research in expressing their ideas and views. Therefore,

personal characteristics such as age, sex education of the sample

have been examined.

Sample representativeness can be seen in several facets and the civil

status of the head of the household is such a component. Figure 3.2

demonstrates the civil status of the sample and it is apparent that

each and every relevant category has been accommodated in the

sample of which nearly 88% of the respondents are married. It

implies that this survey has been able to capture the economic

changes in households well.

Age structure of the sample

In understanding of respondents’ views about particular incidents,

age structure plays an important role. The respondents’ maturity is

probably based even on their age and thus this research has

examined the age distribution of the sample and it is illustrated in

Figure 3.3. The majority of the respondents belongs to the age

category pertaining to labour force participation. It is evident from

the figure that on average the respondents are 39 years of age with

the standard deviation about 13 years. Accordingly, young

respondents have been involved in the sample and their views are

significant for this kind of a research.

On average the

respondents are 39

years of age with the

standard deviation

about 13 years




Figure 3.3: Composition of age-group structure of the sample

Gender distribution

The gender of the respondents in a social science research is also an

important characteristic and facilitates to pursue different attitudes

and different views on a social phenomenon. Therefore, the gender

of the respondents has also been examined and Figure 3.4 presents

the results.

It is apparent that the majority is male (85%) out of the total

respondents investigated for the current study and the

representation of females is approximately 15%. Households are

customarily headed by males in Sri Lankan society while very few

households are headed by females, and such cases are due to

unavoidable circumstances. Therefore, the responded households

are conventionally headed by males and their views will be strong

enough to study the economic conditions of households.

Figure 3.4: Gender distribution of the respondents.

Responded

households are

conventionally

headed by males and

their views will be

strong enough to

study the economic

conditions of

households.


28



Educational qualifications

Person’s attitudes, critical thinking and way of looking and

understanding of social incidents possibly depend on the education

level of the people of a given region or a country. Therefore, it is

critical to know the educational background of the respondents in

social science research. Thus, the variable “level of education of the

respondent” was examined and results are illustrated in Table 3.1.

Table 3.1: Educational qualifications of the respondents

Qualification Distribution of respondents

Count Percentage

Postgraduate 245 22.54

First Degree 236 21.71

Certificate/Diploma 136 12.51

Tech/Voc. Training 76 6.99

Secondary 300 27.60

Primary 84 7.73

Other 06 0.55

No schooling 04 0.37

Total 1087 100.00

Source: Survey data

According to Table 3.1, more than 40% of the respondents were

educated up to degree level and a relatively higher percentage

(about 35%) were educated up to the higher secondary level.

Approximately 25% of the respondents are in the category of

vocational training and certificate or diploma holders. Since

educated people are more likely to develop better moral and ethical

values as compared to uneducated people, this research is privileged

to have a higher percentage (above 50%) of educated people in the

sample.




3.3 The COVID-19 impact on household activities

Due to the COVID-19 outbreak, the Government of Sri Lanka (GOSL)

initially imposed lockdown regulations and declared four days of

working from home and social distancing for the safety of Sri

Lankans. It was unable to achieve the goals through this initial action

and thus, the GOSL introduced an islandwide periodic curfew while a

few areas, Colombo, Kalutara and Gampaha districts, were identified

as red zones (high-risk areas). The high risk zones were imposed

unspecified curfew for more than a month. The smooth-functioning

of economic activities of the society and household activities were

significantly interrupted due to the indefinite curfew in the high-risk

areas and the intermittent curfew in the other areas. Therefore, the

real indirect impact of the COVID-19 reached households and the

current research is aimed at investigating the impact the crisis. This

section of the report analyses the effects on household income,

expenditure and savings in terms of monitory and non-monetary

terms.

The effect of the COVID-19 on income level of households

A sharp vertical reduction in the wages of daily labourers due to the

lockdown of the country was observed, and thus it was requested

that the respondents report on how the household income has

changed during the lockdown period. Figure 3.5 describes the

changes on household income due to pandemic.

Figure 3.5: The COVID--19 impact on household income

The smooth-

functioning of

economic activities of

the society and

household activities

were significantly

interrupted due to the

indefinite curfew.


30



The government continued paying the monthly salary of

government employees during the lockdown period and hence

government employees received their fixed income. Therefore, they

were not harmed due to the COVID-19 outbreak. However, there is

an entire loss of income for 7% of the respondents and these people

may be largely working in the service sectors and are usually self-

employed or informally employed in micro and family enterprises.

They were the people who were in most danger during the

lockdown period. The majority was able to survive through any

means though the household income declined in some amount.

This research did not address the individual economic conditions but

the household conditions. There may be a relationship between

economic activities (job condition) and the household income. Table

3.2 illustrates the relationship between job status and the pattern of

changing income of households. There is no association between

these nominal variables (Cramer’s V=0.08) and thus there is no

relationship between the change in income and the change in job

status after the COVID-19 outbreak. Therefore, the loss of household

income will only be a temporary loss of their jobs and other income

sources. Thus, the financial loss may be a temporary episode.

Table 3.2: Cross tabulation – Changes of income versus changes of

job status after the COVID-191

Change of income

Loss of

job

On compulsory

leave

No change

Working at home

Not doing a job

Received a new job

Total

Totally lost 3% 0% 1% 0% 2% -- 6%

Declined 4% 4% 20% 23% 6% 0% 57%

Not changed

0% 1% 17% 14% 2% 0% 34%

Improved -- 0% 1% 1% 1% -- 3%

Total 7% 5% 39% 38% 11% 0% 100%

Source: Survey data analysis

1 Percentages are given in the table.

Entire loss of income

for 7% of the

respondents and

these people may be

largely working in the

service sectors and

are usually self-

employed or

informally employed

in micro and family

enterprises.




Table 3.3: Relationship between the changes of income versus

changes of business after the COVID-19

Not changed Declined Totally lost Improved

No effect from the COVID-19 1% 1% 0% 0%

Not relevant 28% 35% 3% 2%

Will change the business type 1% 5% 1% 0%

Will close the business 0% 1% 1% 0%

Will go on a business loan 0% 2% 1% 0%

Will be normal after the crisis 2% 9% 1% 0%

Source: Survey data analysis

For further illustration it can be investigated whether there is a

relationship between income shifting and fluctuations of business in

the household. Table 3.3 illustrates no relation between variables

and thus decline or loss of income is a temporary event and the

majority of the respondents will recover it in the post-COVID-19

conditions.

The COVID-19 impact on household expenditure

Figure 3.6: Comparison of before and after mean levels of

expenditure per household


32



During the period of

the pandemic and

economic lockdown

people have reached

zero expenditure

level for many items

and thus they have

made substantial

savings.

The outbreak of the COVID-19 unpredictably changed every aspect

of daily lives, and consumer spending is no exception. Generally

speaking, spending declined since closure of all entities such as

restaurants and shops. And even no means of travelling as lockdown

measures have restricted public movements. Therefore, consumers

are less inclined to spend more due to two reasons. First is the

restricted income and second is the limited means of spending.

Figure 3.6 illustrates the before and after mean expenditure on

different expenditure items selected. As Figure 3.6 reveals, people

have cut down their expenditure on many items after the COVID-19

pandemic. The costs of items of education, transport, entertainment

expenditure, medicine and loan repayment are the expenditure of

items that declined. It can be assumed that all these changes are

provisional and thus, people will be on the same track in the post-

COVID-19 period. These reductions are acceptable since schools and

all the tuition classes completed closed down, there was no chance

for entertainment activities due to mobility restrictions and

lockdown regulations and reduction in loan repayment since the

debts and leasing instalments were to be subject to a few months’

moratorium. At the other end, electricity bills, internet cost and

donations have noticeably increased. It is natural and acceptable

that electricity and internet cost is more during the period of the

COVID-19 pandemic due to the lockdown of the country, keeping all

household members at home with mobility restrictions. One

important aspect of this is that donations have increased by people

who can afford them, compared to the pre-COVID time-span. Sri

Lankans have proven that they are having the power to improve

others’ lives whenever possible and that is a privilege.

Notably, the data also reveals that the economic impact of the

lockdown has not been equally distributed across all layers of the

community and places in the country. However, during the period of

the pandemic and economic lockdown people have reached zero

expenditure level for many items and thus they have made

substantial savings within the household budget. Thus, it is

important to know in which areas the people make savings and next

section is examines the issue.




Direct effects of the

COVID-19 outbreak

create destructive

effects on households

through loss of

income, which limit

their ability to pay off

existing debts and

consequently a severe

financial stress.

The COVID-19 impact on household savings

In a pandemic lockdown situation, savings will rise in two ways. The

first category is the voluntary savings people build up to cushion a

shortfall in future income due to possible job loss. The second

category is the involuntary savings arising due to people not

spending or under-spending in a lockdown.

Figure 3.7: Contributors to savings during period of the COVID-19

and economic lockdown

As Figure 3.7 illustrates, the deferred expenditure on festivals and

functions, costumes of clothing and fashion, transport and fuel cost

and tuition fees are the significant areas where households made

their savings. It was found that 2% of households experienced net

losses instead of savings and the loss was estimated LKR 60,000 per

household on average per month during the period of the economic

lockdown. Fifteen per cent of households reported no loss or no

savings. Average savings amounted to LKR 70,000 with a larger

standard deviation. However, the median savings per household

amounted to LKR 20,000.

The COVID-19 and indebtedness of households

It is reasonable to argue that the COVID-19 pandemic embodies an

unprecedented shock to households around the world and there is

no exception for Sri Lanka. These shocks are exploding to

households through some direct channels including loss of

employment because of the lockdown of the economy, and mobility

restrictions due to curfew and social distancing. These direct effects

of the COVID-19 outbreak create destructive effects on households

through loss of income, which limit their ability to pay off existing

debts and consequently a severe financial stress will be on them.


34



Therefore, the current research paid the attention to examining the

indebtedness of households due to the COVID-19 outbreak. Figure

3.8 illustrates the effects of the COVID-19 on household debts.

Figure 3.8: The COVID-19 impact on household indebtedness

It is impressive to observe that 79% of the households experienced

no change in debt liabilities whereas only 6% of the households fell

into indebtedness due to the COVID-19 outbreak. Therefore, it can

be safely concluded that the COVID-19 has not created a debt trap

for many of the households in the Sri Lankan economy. The

information provided in Figure 3.8 can be shared to better

understand the debt issues in households. As per the visual

impression of Figure 3.8, more than 80% of household have not

borrowed for any means. It is evidently compatible with the

information given in Figure 3.8 that 79% of the households said that

their indebtedness has not changed. Five to ten pe rcent of the

households borrowed for loan repayments and daily consumption

needs while a very small percentage of households borrowed for

medical treatment and bill payments. Indebtedness has not much

exploded on Sri Lankan household where just 8% of the households

are requesting financial assistant for repayment of loans borrowed

during pandemic. However, it does not mean that the households

concerned are free from indebtedness. The data implies that they

have maintained their debt liabilities during lockdown as at pre-

COVID-19 the level. This outcome is the result of:

Expenditure on

education, transport,

entertainment,

medicine and loan

repayment have been

declined and all these

changes are

provisional.




The COVID-19 has not

created a debt trap

for many of the

households in the Sri

Lankan economy.

(1) Government/charity organization free food rationing

programs

(2) Payment of 5000x2 payment for the most vulnerable families

and Samurdhi recipients

(3) Debt moratorium of 3 months for bank loan and lease

repayments

(4) Extending credit period of credit cards, deferring payment for

water/ electricity bills, telephone/internet bills, without red

notice or disconnection, extending vehicle licensing with no

penalty.

All these factors imply that, except for permanent income holders,

all other vulnerable income groups are very likely to fall into

inevitable indebtedness in three months’ time, unless their income

sources are reinstated at the pre-COVID-19 level.

Figure 3.9: Loan categories of households during pandemic

The COVID-19 and employment status of the household

With the rapid increase of the COVID-19 cases in the country, the Sri

Lankan Government restricted access to in-dining restaurants,

theatres, concert halls, some retail stores and other non-essential

businesses where large groups of people work.

Additionally, public health officials, GOSL and other relevant

authorities have warned Sri Lankans to stay at home. Many other

businesses have voluntarily decided to close down to protect


36



employees and the public as a whole. Meanwhile, the GOSL declared

four days of “work from home,” implementing nationwide curfew

for the safety of public sector workers and decided to continue the

impermanent curfew throughout the country. These decisions

unfavourably affected the livelihood of the households and directly

affected the employment status of the country. Therefore, the

current research endeavoured to examine the reality of the

employment status of Sri Lankan households during the pandemic.

Respondents were requested to report what happened to their

employment status due to the COVID-19.

Figure 3.10: Changing employment status due to the COVID-19

pandemic

Figure 3.10 portrays the experienced employment behaviour due to

the COVID-19 outbreak. According to the information available from

the survey, 82% of the households are protected since they have a

permanent position in their career. Seven per cent of households

totally lost their employment opportunities. While millions of the

workers are laid off around the word due to the COVID-19 outbreak,

Sri Lanka is in a strong position to protect the employment status of

the households. The most vulnerable group of employees is the

people who worked in informal sectors, particularly on a day

payment basis.

According to the survey data, “daily basis workers” and employees

from informal sectors are the most vulnerable groups due to the

pandemic. -Ninety-two per cent of the households claimed that daily

basis workers are vulnerable to pandemic shocks while 80% of the

households claimed that three-wheeler owners are also vulnerable.

Government decisions

unfavourably affected

the livelihood of the

households and

directly affected the

employment status of

the country.




However, most part of the temporary unemployment were

disappearing when the report was being finalized. The most

vulnerable employees are people who were directly and indirectly

attached to the tourism and travel industry. Although more

unemployed people will be backed in to their workplace in the post-

COVID-19 period, employees attached to travel and tourism have to

wait for a long time period until the industry is normalized, and thus,

government intervention is required.

The COVID-19 and once for all monetary shocks to households

The COVID-19 has had unprecedented socio-economic impacts on

Sri Lankan households through different channels. Due to the

sudden economic lockdown of the country, implemented health

precautions such as social distancing and implementing of

nationwide curfew regulations, the Sri Lankan economy has shrunk

unexpectedly. As a result, many businesses lost their profit and

individuals and organizations abruptly lost their instantaneous

income as well. Current research has paid attention to these issues

and requested the respondents to report the unforeseen financial

loss of the last month as well as the unexpected one-time financial

loss during the last month.

Figure 3.11: Financial loss due to the COVID-19 pandemic

Figure 3.11 describes the financial loss of households for entire last

months and for one time lost during the pandemic. Financial loss is

not applicable to many households while the remaining households

Daily basis workers

and employees from

informal sectors are

the most vulnerable

groups due to the

pandemic.


38



No any kind of

financial loss for 40%

of the households.

It is apparent that

there is no significant

difference between

onetime financial loss

and one-month

financial loss for all

households.

(approximately 60%) had experienced a particular level of loss. It is

apparent that there is no significant difference between onetime

financial loss and one-month financial loss for all households that

have faced a loss. It is important to investigate what kind of loss has

been experienced by many households and thus respondents were

requested to report the type of damage they have undergone.

Figure 3.12 illustrates the summary of sources of financial losses.

High internet costs, electricity bills, loss of private tuition teaching,

loss of overtime payments, and closure of service stations,

disruption of business due to the lockdown and partial loss of salary

are the significant sources of financial losses of households. No

significant losses are observed from the agriculture, farming and

animal husbandry.

Figure 3.12: The source of financial damage to households.

The COVID-19 impact on household assets base

Maintaining a substantial level of assets by households brings the

benefits such as generating income, more consumption, generating

future assets and self-sufficiency. Households are generally

sustaining different kinds of assets for the betterment of the

household economy and thereby for a quality livelihood of its

members. Therefore, maintaining a particular level of assets

produces positive effects on the household, but occasionally, a

negative impact on the national economy. These assets can be

categorized into many categories and this research is interested in

two types of assets; namely, financial assets (liquid assets) and real

assets (fixed assets).




No significant losses

are observed from the

agriculture, farming

and animal

husbandry.

This research attempted to investigate the effect of the COVID-19 on

the changes of both types of assets by comparing the pre-COVID-19

and post-COVID-19 levels. Figure 3.13 presents the impact of the

COVID-19 pandemic on fixed assets and it reveals no substantial

effect on those assets. Approximately 10% of households have

mortgaged their jewellery and related items such as mobile phones

to solve temporary liquidity problems but there was no substantial

effect on other types of real assets.

Figure 3.13: Effect of the COVID-19 on fixed assets of households

Figure 3.14 presents the effects of the COVID-19 on financially

related assets and liabilities. On the one hand, where the assets are

concerned, it is noticeable that cash balances and current/savings

account balances markedly declined. On the other hand, when the

liabilities are concern credit card outstanding balances, borrowings

and procrastinated leasing instalments have considerably increased.

Although not repeated here, all the unsettled water/electricity/

telephone/internet bills need to be considered as increased

liabilities of the household. The dual action of liquidation of financial

assets and accumulation of financial liabilities imply that these

households are now compelled to suffer financial distress due to the

COVID-19. The government has already advised commercial banks to

adjust the credit period and minimum balance of the credit cards in

favour of the customer. Nevertheless, the government should not

undertake any financial liabilities of households but needs to take


40



The dual action of

liquidation of financial

assets and

accumulation of

financial liabilities

imply that these

households are now

compelled to suffer

financial distress due

to the COVID-19.

corrective measures to sustain their livelihoods enabling the

households themselves to meet their liabilities.

Figure 3.14: Effect of the COVID-19 on household assets

Mostly vulnerable and economically hard hit groups due to the

COVID-19 in Sri Lanka

Economic implications of the COVID-19 are unprecedented and all

the sectors of the economy have been affected. According to media,

the most vulnerable group of people due to the COVID-19 pandemic

is the daily wage workers and thus the government of Sri Lanka

initiated relief packages for them to sustain their livelihood. There

were discrepancies in distributing these relief for people and many

arguments in selecting the hard hit persons due to the pandemic.

Therefore, the current research decided to investigate the most

vulnerable groups in the economy. Respondents were requested to

identify 10 groups experiencing economic hardship due to the




COVID-19 in their surroundings. Figure 3.15 presents the summary

of the findings:

Figure 3.15: The COVID-19 most affected categories in the economy

According to the survey, daily wage earners, three-wheel owners,

barber shop/salon owners, tuition teachers, lottery and newspaper

dealers, domestic self-employees, carpenters and masonry workers,

school van owners, lottery/newspaper dealers, and pavement

hawkers are the order of severely affected segments of the COVID-

19. However, daily workers are the most vulnerable since it is

impossible for them to recover the income foregone soon after the

outbreak, compared with many other groups. However, the loss to

many other segments is not limited to the income foregone, but

includes the fixed cost they have to bear (monthly rental for

business premises) even in the absence of an income.


42



About 75 % of

households are ready

to continue home

gardening during the

post-COVID-19 period

Post-COVID-19 expectations of households

New habits

It is undebatable that behaviour of Sri Lankan households has

undergone many drastic changes in different aspects and

consequently there will be some changes on the economy and the

society in the post-COVID-19 pandemic. Therefore, the research

team was encouraged to collect such data on the good practices

they started during the lockdown and expect to continue even after

the COVID-19 pandemic. Figure 3.16 is one such presentation. Sri

Lankans have changed their minds and practices with the new

COVID-19 outbreak. The government of Sri Lanka encouraged home

gardening and as a result about 75 % of households are ready to

continue home gardening during the post-COVID-19 period as well.

It is a noticeable change in society.

Figure 3.16: Habits to be continued after the COVID-19 pandemic

by Sri Lankan households

Economic, social and environmental benefits can be seen in home

gardening. In terms of economic benefit, self-sufficiency can be

enhanced among growers. Further, it generates additional income

and thereby improves the livelihood of the households.

Consumption of home-grown food products can lead to retaining

more disposal income that can be used for other domestic purposes,

improving household welfare. Households are planning to reduce

consumption of non-essential goods materials and thus, they have

learnt a lesson from the COVID-19 outbreak and they will be able to




More than 50% of

households are not

requesting any kind of

financial assistance

during the post-

COVID-19 period.

save money. A noticeable percentage of households have

understood that they are wasting consumables due to insensibility.

It is unbelievable that Sri Lankans waste food items everywhere, be

it at homes, restaurants, or hotels. People in another part of the

world are in starvation for days and months due to lack of food

items. Therefore, reducing wastage consumables will have an

economic impact as well.

Further, a substantial portion of households are ready to continue

the habit of the consumption of natural, local and organic foods.

Protection for the local industries and generating additional jobs in

the economy are some of the direct economic advantages

achievable with the rising demand for local and natural foods.

Indirectly, people of the country will maintain a healthy life and

thereby reduce government expenditure on the free provision of

health service. The research revealed that the households do not

have strong plans to reduce smoking and alcohol usage. This was

further proven by the long queues lined up when liquor bars were

reopened. Thus, the government should have no fear of losing tax

income on tobacco and liquor, which is the topmost excise duty

source of the government.

Fulfilling financial difficulties

Since the COVID-19 wafted many direct and indirect impacts on

households that have experienced financial difficulties during the

pandemic period. This research was aimed at investigating what kind

of strategies that the people practice in future in fulfilling the

financial difficulties. Respondents were requested to mark any

three important areas for financial assistance and Figure 3.17

illustrates the summary of the findings:

More than 50% of households are not requesting any kind of

financial assistance during the post-COVID-19 period while around

45% of households are seeking financial support for loan repayment,

freeing mortgaged items, to settle outstanding balance of credit

cards among these loan repayment being the most required item

and thus, financial institutions need short-term as well as long-term

plans with government involvement to mitigate the financial distress

of the households. The current debt moratorium introduced by the

Central Bank for three months would provide only a cushion. The

liabilities will be accumulated and both the borrower and the


44



Priority areas for

technical assistance

are agriculture,

initiating a new

business, investment-

related and finance-

related.

lending institution will be in trouble after these months, unless the

borrower’s income sources are not regained.

Figure 3.17: Financial assistance required to address financial

difficulties due to the COVID-19

Technical assistance for regaining household economy

The COVID-19 outbreak affected entire household activities

including the business activities they were maintaining. At the other

end, the economy is experiencing a downturn of the many sectors.

In such a context people may hope to request many kinds of

assistance to regain the business and/or livelihood of the

households. Therefore, the research team endeavoured to search

for such needs and Figure 3.18 is the result.

Approximately 55% of households are not expecting any kind of

assistance since they have no kind of permanent damage due to the

COVID-19 and most probably the members of those households

comprised government and/or private sector permanent employees.

Priority areas for technical assistance are agriculture, initiating a new

business, investment-related and finance-related. Forty-five per cent

of households are expecting some type of advice for their

betterment and thus, government intervention is important.




Public sector

employees were not

harmed due to the

COVID-19 outbreak.

Seven per cent of the

households lost their

total income and

these people were

usually self-employed

or informally

employed in micro

and family

enterprises.

Most part of

temporary

unemployment was

disappearing when

the report was being

finalized.

Figure 3.18: Type of expected technical assistance after the COVID-

19 pandemic

Formal or informal organizations, which are called social capital

formation, play an important role in such situations like the COVID-

19 outbreak. Therefore, 78% of households are happy to form such

an organization in their surroundings for mutual assistance among

community.

3.4 Chapter summary

This chapter provides the results of the investigations of the COVID-

19 impact on Sri Lankan households. The sample of 1087 households

were analysed for the COVID-19 impact. Public sector employees

were not harmed due to the COVID-19 outbreak. Seven per cent of

the respondents lost their total income and these people were

employed largely in the service sectors and are usually self-

employed or informally employed in micro and family enterprises

and they were the people who were in most danger during the

lockdown period. In terms of expenditure, households saved money

on the cost items of education, transport, entertainment, medicine

and loan repayment, which are the expenditure declined items. It

can be assumed that all these changes are provisional and thus,

people will be on the same track in the post-COVID-19 period.


46



Seventy-five per cent

of households are

ready to continue

home gardening

during the post-

COVID-19 period as

well.

It is impressive to observe that 79% of households experienced no

change in debt liabilities whereas only 6% have fallen to

indebtedness due to the COVID-19 outbreak. Though indebtedness

has not exploded on Sri Lankan household too much, where just 8%

of them are requesting financial assistance for repayments of loans

borrowed during pandemic. However, it does not mean that the

households concerned are free of indebtedness. The data implies

that they have maintained their debt liabilities during lockdown as at

the pre-COVID level.

According to the survey data “daily basis workers” and employees

from informal sectors are the most vulnerable groups due to the

pandemic while 7% lost the entire job opportunity. The second most

vulnerable group of employees were the three-wheel owners.

However, the most part of temporary unemployment was

disappearing when the report was being finalized. Although more

unemployed people will be taken back into their workplace in the

post-COVID-19 period, employees attached to travel and tourism

have to wait for a long period until the industry is normalized and

thus, government intervention is required.

High internet costs, electricity bills, loss of private tuition teaching,

loss of overtime, and closure of service stations, disruption business

due to the lockdown and partial loss of salary were the significant

sources of financial losses of households. No significant losses were

observed from agriculture, farming and animal husbandry.

The dual action of liquidation of financial assets and accumulation of

financial liabilities imply that these households are now compelled

to suffer from financial distress due to the COVID-19. The

government has already advised commercial banks to adjust the

credit period and minimum balance of the credit cards in favour of

the customer. Nevertheless, the government should not undertake

any financial liabilities of households but needs to take corrective

measures to sustain their livelihoods, enabling the householders

themselves to meet their liabilities.

Sri Lankan households have undergone many drastic changes in

different aspects and consequently there will be some changes on

the economy and the society in the post-COVID-19 pandemic.

Seventy-five per cent of households are ready to continue home

gardening during the post- COVID-19 period as well.




Forty five per cent of

households are

seeking financial

support for loan

repayment, freeing

mortgaged items, and

to settle outstanding

balance of credit

cards.

More than 50% of households are not requesting any kind of

financial assistance during the post-COVID-19 period while around

45% of households are seeking financial support for loan repayment,

freeing mortgaged items, and to settle outstanding balance of credit

cards. The current debt moratorium introduced by the Central Bank

for three months would provide only a cushion. The liabilities will be

accumulated and both borrower and the lending institution will be

in trouble after these months, unless borrower’s income sources are

not regained.

Approximately 55% of the households were not expecting any kind

of assistance since they have no any kind of permanent damage due

to the COVID-19 and most probably the members of those

households comprised with government and/or private sector

permanent employees. Priority areas for technical assistance are

agriculture, initiating a new business, investment -related and

finance-related. Forty-five per cent of households are expecting

some type of advice for their betterment and thus, government

intervention is important.


48




49

CHAPTER IV

THE COVID-19 IMPACT ON DIVERSE SECTORS IN THE SRI LANKAN ECONOMY

Chapter IV The economic impact of the COVID-19 pandemic in Sri Lanka

50



The COVID-19 Impacts on Diverse Sectors in the Sri Lankan Economy

4.1 Introduction

The novel Coronavirus termed “COVID-19” was first identified in

China in December 2019. Thereafter, it significantly blew out across

borders and harmed countries around the globe. The World Health

Organization (WHO) declared Coronavirus as the COVID-19

pandemic on 11th March 2020. With the continuous outbreak of the

pandemic, governments around the world laid a variety of health

measures to save the public. Consequently, travel bans, nationwide

curfews, social distancing measures, movement restrictions and

even border closures have been imposed. The introduction of such

health measures adversely affected the livelihood of people,

businesses, communities and households alike while creating severe

impacts on the global economy as well as regional economies and Sri

Lanka is no exception. Each and every sector, including travel and

tourism, construction, banking and finance of the Sri Lankan

economy, was severely hit hard by the COVID-19 and this section of

the research investigated the COVID-19 impact on some selected

areas of the Sri Lankan economy.

4.2 Micro, small and medium-scale enterprises

Introduction

The MSME sector in Sri Lanka consists of Micro, Small, and Medium

scale industries. MSMEs have been significantly contributing to the

Sri Lankan economy until the COVID-19 pandemic. The number of

establishments in the MSMEs is around one million, which provides

livelihood to nearly 2.25 million persons in the economy

(Gunawardena, 2020).

The MSMEs' production activities of the economy of Sri Lanka are

mainly concentrated on three major economic sectors, namely, (a)

Each and every sector,

including travel and

tourism, construction,

banking and finance

of the Sri Lankan

economy, was

severely hit hard by

the COVID-19



University of Ruhuna, Marata, Sri Lanka 51

Industry and construction, (b) Trade and, (c) Services. It shows that

91.8% of the establishments in the country are micro-enterprises,

whereas 7% are small, 1% are medium and the balance 0.2% are

large enterprises (Department of Census and Statistics, 2015).

The contribution of MSMEs to gross domestic product (GDP) is 52%

20% of exports, 30% of the production value-added in the

manufacturing sector and 45% of the total employment of the

labour force (Gunawardena, 2020; Ministry of Industry &

Commerce, 2015). Therefore, The MSME sector can be considered

as one of the major growing sectors in the economy. The MSME

sector is one of the mostly contributed sectors for rural economy in

the country since approximately 92% of the establishments are in

the category of small scale (Gunawardena, 2020).

Impact of the COVID-19 pandemic on MSMEs in Sri Lanka

Information covered in this section is based on nearly real-time

evidence which was gathered from in-depth interviews with Micro,

Small and Medium Enterprises (MSMEs) experts from different

districts in Sri Lanka as well as a thorough review of research

literature published by relevant authorities on the impact of the

COVID-19 pandemic.

The COVID-19 pandemic has caused unprecedented challenges for

MSMEs in Sri Lanka that include difficulties in cash flows, breakdown

in supply and demand chains, reduction of employment, and

rigorous decrease in both market supply and demand for goods and

services of enterprises.

Demand disruptions for goods and services of MSMEs are mostly

due to (1) contraction of aggregate demand in both domestic and

foreign purchase, (2) wait-and-see purchase delays by consumers

domestically, under a partial lockdown situation. Almost all the

production activities of MSMEs significantly hit by the COVID-19

pandemic while employees were also suffered.

Many MSMEs in Sri Lanka significantly failed in business as they had

been unable to diversify their production processes before or

immediately after the COVID-19. Focus group discussions revealed

that the weak production structures in many organizations caused to

aggravated conditions of their businesses due to the COVID-19.

The COVID-19

pandemic has caused

unprecedented

challenges for MSMEs

in Sri Lanka that

include difficulties in

cash flows,

breakdown in supply

and demand chains,

and reduction of

employment.


52



Staff salary payments, loan instalments, and rent for space are the

main operational cost of MSMEs in Sri Lanka during the pandemic, of

which the difficulties in paying staff salaries are highlighted as the

sensitive prime issues for 50% to 70% of MSMEs (Focus Group

Discussions, 2020). According to in-depth interviews, it is reported

that 10% to 20% of enterprises are suffering from paying loan

instalments while rental payments for premises as an issue which

accounts for 15% to 20% of enterprises. The in-depth interviews

indicate that if the impact of the COVID-19 further continues,

MSMEs will resort to measures such as layoffs and salary cuts to

reduce costs.

However, the transformation of most MSMEs for the sudden

situation has been hindered by a lack of resources (obtaining raw

materials), capabilities, strategic vision, and negative attitudes

towards the production process of the enterprises.

In creating an unfavourable impact on both supply-side (production

of goods and services) and demand-side (consumption and

investment), industry and service sector enterprises in Sri Lanka

(beauty salon, salon, basic metal product, leather product, small-

scale textile product, and cement related business) have most

severely been hit hard by the COVID-19 pandemic.

Almost 60% of the micro enterprises have not kept up their account

properly and thus, they have no clear mechanism for calculating

their cost of production. There is no proper mechanism to

distinguish profit from the total revenue. They treat the remainder

after paying all the purchase not including their cost of labour as a

profit, which is wrong. This is an inherent issue for the majority of

microenterprises in Sri Lanka. Accordingly, all microenterprises are

severally opened to deterioration of their financial position under

unexpected events like the COVID-19 pandemic.

The most severely affected enterprises were the "Accommodation

and food service sector,” which is the major part of the tourism

industry. The tourist guides, stores of restaurants, hotels, motels,

lodges and guest houses, logistics and transportation, and cultural-

related activities are severely hit by the COVID-19 pandemic.

The number of establishments in the accommodation and food

service sector is around 100,000 that provides 200,000 employment

opportunities for the persons in the economy (Department of

Almost 60% of the

micro enterprises

have not kept up their

account properly and

thus, they have no

clear mechanism for

calculating their cost

of production.




Census and Statistics, 2015). Thus, the above sector generally finds

supporting policies focused on operating costs reduction or

exemption, production, and work resumption promotion during

these unprecedented times.

It is required to develop and encourage the use of online sales

channels as a potential strategy to accomplish unstable market

conditions with the production process of the enterprises.

Nearly 10% of MSMEs have got through to adjust their business

strategies to suit the requirements which arose under the pandemic

environment. Especially, some MSMEs in the apparel and textile

industry in Sri Lanka have shifted their production procedures to

manufacturing respirators and protective clothing such as face

masks. This not only supports the enterprises to sustain their cash

flow without any hindrance under the current crisis but also guides

them to enter the growing new markets with possible future

expectations.

Due to the loss of buyers from foreign countries under partial

lockdown, export-oriented enterprises such as small-scale

household-based textiles and garments activities, gems, diamond

and jewellery, ornamental fish farming, ornamental floriculture,

spice production, coconut-related production, and minor export

crops, have been severely hit under the COVID-19 pandemic.

Further, the enterprises, which are the major suppliers for the

export market, faced contraction of demand for textiles and

garments, gems, diamond and jewellery, ornamental floriculture and

spices, especially from countries such as China and America and

Europe, which are the worst affected countries by the COVID-19

pandemic.

Despite the negative impact of the COVID-19 pandemic on MSMEs,

nearly 15% of MSMEs have benefited under the current crisis. Retail

and wholesale trade, Ayurveda medicine activities, and computer

sales have been continuing their business situation without creating

any burden on their sales under the existing crisis.

Another positive outcome of the COVID-19 pandemic is that it has

generated new business models, such as staff sharing for the whole

economy, including MSMEs in Sri Lanka.

Due to the loss of

buyers from foreign

countries under

partial lockdown,

export-oriented

enterprises such as

small-scale

household-based

textiles and garments

activities, gems,

diamond and

jewellery, ornamental

fish farming, have

been severely hit

under the COVID-19

pandemic.


54



Policy priorities

The following recommended guidance could be put forward to

ensure the orderly resumption of MSMEs' production, strengthen

financial support, innovation support, public services, and overall

MSME coordination in aiming to rebuild a sustainable basis for

MSMEs in Sri Lanka.

• The government and other responsible authorities shall

coordinate the domestic and foreign markets to sell the

unsold excess production of enterprises during the COVID-19

pandemic. These immediate initiative steps will guide to

cover the sunk costs as well as to reduce the financial

pressure of the most affected enterprises due to insufficient

cash flow.

• The government-led formal mechanism should be

established for developing linkages between MSMEs and

other complementary institutions, which will guild to

maintain the sustainability of enterprises against unexpected

events like the COVID-19 pandemic. Promotion of Public-

Private Partnership Strategy (PPPS) for enterprises and the

establishment of planned cluster-based enterprises may be

the viable masterstroke for the future enterprise

development scenario in Sri Lanka.

• For MSMEs with insufficient cash flow, the government shall

implement sound financial support policies to help

enterprises to minimize their financing difficulties which are

the major problems encountered during the COVID-19

pandemic. Meanwhile, continuous policy packages shall be

introduced especially covering all areas of micro-enterprise

activities to sustain their long-term production process and

expectations as well as to secure from the risk of future

emergencies based on the COVID-19 experience.

• To address the financial issues of the enterprises, an SMEs’

friendly banking system shall be established under the

patronage of the government and the Central Bank of Sri

Lanka. Emergency financial supports for fragile SMEs could

be one important component of the response. For the

MSMEs that have temporarily lost their sources of income

because of the COVID-19 pandemic, the Central Bank and

other financial institutions should give priority when they

apply for business guarantee loans.

To address the

financial issues of the

enterprises, a SMEs’

friendly banking

system shall be

established under the

patronage of the

government and the

Central Bank of Sri

Lanka.




• The government and other responsible institutions could also

provide timely financial support such as loans at

concessionary rates of interest, wage subsidies, deferred or

waived taxes, and fees for MSMEs. For instance, The Central

Bank’s recent policy lending rate cut will also support MSMEs

in Sri Lanka. Further, the Central Bank of Sri Lanka has

recently taken policy decisions to support lending facilities by

alleviating monetary conditions and enabling financial

institutions to provide more loans to MSMEs, some of which

are backed by refinance schemes.

• The Central Bank of Sri Lanka, as an apex institution of the

financial system, in company with the Ministry of Finance has

introduced refinance schemes such as “Saubhagya” and

“Enterprise Sri Lanka” loan schemes for alleviating the

financial burden of MSMEs. However, these loan schemes

reached the enterprises with adequate collaterals, but not to

all the enterprises. To empower the financial strength of

MSMEs, the government should implement policies to

increase project-based lending rather than collateral-based

lending. Thus, the government should take action to initiate

sound financial inclusion programmes targeting

underprivileged micro-enterprises, especially under

unexpected events like the COVID-19 pandemic.

• The relevant authorities take concrete action to introduce

the required strategies to diversify the production process of

MSMEs. Parallel to these processes, a viable programme

should be implemented for sharing knowledge between R&D

institutions and MSMEs under innovation support.

• The current pandemic has highlighted that special programs

could be planned to emphasize the importance of risk

management strategies for enterprises and enterprises can

comprehend how these strategies help them to cope with

their business under crises like the COVID-19 pandemic. The

government of Sri Lanka should initiate sound policy

guidance for implementing a suitable risk management

strategy for MSMEs.

• A National SME Portal shall be established to keep important

records of the enterprises in Sri Lanka. The portal may be

operative 24 hours a day to receive problems and

suggestions of MSMEs. The relevant institutions can examine

To empower the

financial strength of

MSMEs, the

government should

implement policies to

increase project-

based lending rather

than collateral-based

lending.


56



these issues and suggestions of enterprises for planning their

timely support.

4.3 Impact on Sri Lanka stock market

The Colombo Stock Exchange (CSE) has 290 listed companies

representing 20 Global Industry Classification Standard (GICS)

industry groups as at 20th January 2020, with a Market

Capitalization of LKR 2,748.10 billion. Before the CES closed on

March 20th following the lockdown, the stock market’s S&P SL 20

share index crashed by almost 12% to 1943.55, recording its biggest

intra-day fall, (see Figure 4.1) while its benchmark All Share Price

Index fell more than 6% to 4571.63 (see Figure 4.2) due to panic

selling.

Figure 4.1: The behaviour of S&P SL 20 share index before

closedown in March 2020

The market remained closed during the 51-day lockdown and was

reopened on 11th May for trading. After reopening on 11th May, the

CSE underwent automatic closure within a few minutes for the first

time in history because the S&P SL 20 index had dropped more

than10% from the previous close. The S&P SL20 Index ended

10.11% lower, at 1,750.49 points, while the All Share Price Index fell

4.10% to 4,384.10 points with the turnover of LKR 24.89 million at

closure. The decline continued for the following two days, mostly

driven by foreign investors’ selling pressure and the S&P SL 20 index

hit bottom at 1690.60 and ASPI hit at 4247.95 (See Figure 4.3 and

4.4).




Figure 4.2: The behaviour of the ASPI before closedown in March

2020

This is quite natural because the market closed down on 20th March

with strong selling pressure. The international stock markets also

showed the same trends during the corresponding period due to the

COVID-19 pandemic. For example NIKKEY Tokyo on 19th March,

Dow-Jones USA and FTSE UK hit bottom on 23rd March. The MSCI

World Index, which indicates stock market movements of 23

developed nations, fell by 34% from peak to trough within a month,

down to its lowest ever since 2016. Similar to other economies,

uncertainty over economic slowdown in Sri Lanka, led to a sell-off in

the financial market and capital outflows. Despite the foreign selling

pressure, the CSE turned up and showed a little improvement after

12th May. This implies that investor sentiments are becoming

positive gradually.

Figure 4.3: The behaviour of S&P SL 20 after reopening in May 2020


58



The COVID-19

pandemic has kept

investors in suspense

since February,

putting markets into

high levels of

volatility,

divestments, and

flight into “safer

haven assets”.

Figure 4.4: The behaviour of ASPI after reopening in May 2020

Market analysts expect this situation to continue until the market

settles down as both local and foreign investors are looking at

exiting from risky assets due to the global pandemic. The COVID-19

pandemic has kept investors in suspense since February, putting

markets into high levels of volatility, divestments, and flight into

“safer haven assets”. In addition to the COVID-19 impact, foreign

investors must have taken into consideration the fact that Sri Lanka

has been downgraded by international credit rating agencies (See

Table 4.1). Investment analysts are of the view that there is no point

in implementing circuit break rules. The investors must be allowed

to sell their shares and the market must be allowed to function

freely until it becomes normal.

Table 4.1 Sovereign Credit Ratings of Sri Lanka from 2018 to 2020

Agency Rating Outlook Date

Fitch B Stable 3-Dec-18

Fitch B Negative 18-Dec-19

Fitch B- Negative 24-Apr-20

S&P B Stable 4-Dec-18

S&P B Negative 14-Jan-20

S&P B- Stable 20-May-20

Although the market indices started moving upward slowly, analysts

do not expect the market would be fully recovered in the near

future. The recovery depends on many factors, including the

regaining of the leading business sectors of the economy, investor

confidence, political stability, government policies and the global

business environment. It is unrealistic to believe that the hard hit

sectors such as tourism, constructions, aviation, automotive will be




recovered soon. Furthermore, the political instability mounted by

the forthcoming election, losing profitability of the firms, Sri Lanka’s

high credit risk, and poor fiscal conditions, will worsen the

conditions. However, the low interest rates in the banking sector

and deteriorating exchange rates will marginally help accelerate

recovery. The CBSL, on May 6, cut benchmark interest rates for a

third time since the COVID-19 outbreak to reinforce the economy

against the fallout of the pandemic.

Figure 4.5: Potential gainers and losers in the stock market

The stock price, in absence of speculation, is a reflection of the

company’s business performance. The COVID-19 badly hit or

devastated industry sectors such as tourism, aviation, automotive,

constructions, manufacturing including textiles & garments, whereas

marginally boosted some sectors such as agriculture, e-commerce,

telecommunication, pharmaceuticals, medical service etc. The

impact on tourism, automotive, constructions, manufacturing

including textiles & garments will last over one year or so, whereas

education, aviation, banking & commercial services and transport

will recover in a short period of time, hopefully within three months.

This will be reflected in the share prices as well.


60



The textile and

garment industry in

Sri Lanka recorded

USD 5.6 billion in

export earnings in

2019 and the

estimated losses for

the 3-month period

from 15th March to

15th May round up to

USD 1,400 million.

Remedies

In the short-term, the government has to provide additional

support for businesses to help smooth the impact of the

COVID-19 on their core business. The debt moratorium for

interest and capital payments tax concessions will ease

financial pressures on businesses. However, the government

should not weaken the liquidity levels of banking

institutions which are well performing in the stock market in

its attempt to give concessions to other affected industries.

Promotional campaigns will help raise international

awareness and investor interest in Sri Lanka’s stock market.

The government has already started this not to promote the

stock market but to sustain the sovereign credit rate

without falling to CCC+.

4.4 Textile and garment sector

Despite the Easter Sunday Attacks, the earnings from industrial

exports, which accounted for approximately 79% of the total export

earnings, increased USD 9,426 million in 2019 from USD 9,258

million in 2018, mainly supported by the growth in textiles and

garments exports. Being the largest contributor, the earnings from

textiles and garments increased by 5.2% to USD 5,596 million in

2019.

Earnings from garment exports to the USA increased by 3.0% to USD

2,338 million in 2019. Garment exports to the EU also increased by

4.9% to USD 2,153 million, stimulated by the regaining GSP+

concessions, while the UK, the second-largest single buyer of Sri

Lankan garments accounted for USD 747 million. Furthermore, Italy,

Belgium, Germany, and the Netherlands in the EU as well as

Australia, Canada, Japan, and India were among the uppermost

buyers of Sri Lankan garments before the COVID-19 outbreak.

Revenue loss

• The impact of the COVID-19 on the textile and garment

industry in Sri Lanka is unprecedented, and second to none

on both the demand and the supply sides. The industry

recorded USD 5.6 billion in export earnings in 2019.

Assuming export earnings are equally distributed throughout

the year, the estimated losses for the 3-month period from




Mass cancellation of

orders by buyers and

problems in the

purchasing of

necessary raw

materials, coupled

with delayed

shipments, forced

discounts, and

currency

depreciation, have led

to working capital

problems across the

industry.

15th March to 15th May round up to USD 1,400 million, and

the situation is unlikely to achieve or reach near the annual

target of 2019, totalling to USD 5.6 billion exports.

• The Joint Apparel Association Forum (JAAF) foresees an

immediate contraction of USD 1.5 billion in Sri Lankan

apparel exports during the 3-month period ending in June, as

against the last fiscal year. However, further demand

contractions could result in a reduction of apparel exports by

an additional 30 – 40% after June, due to mass cancellation

of orders by buyers and problems in the purchasing of

necessary raw materials. These circumstances, coupled with

delayed shipments, forced discounts, and currency

depreciation, have led to working capital problems across the

industry. The suppliers usually commence production 4 - 6

months ahead of the product reaching the export

destinations. Some cancellations even relate to products that

were put into production in January. Some products, while

being ready for shipments, have been cancelled or have not

been shipped because of the lockdown. This will cause

revenue losses running to the 3rd quarter of the year as well.

• Delays in production due to lockdown caused further

cancelation of orders, which shifted to countries such as

Vietnam, Cambodia, and Indonesia, which were completely

operational.

Demand-side

The market for Sri Lanka’s textiles and garments

concentrates on the USA, UK, and EU countries. Figure 3.6

shows the concentration of Sri Lanka’s textiles and garments

market. The most alarming signal is that 45% of the Sri

Lankan export market depends on the USA, which is the most

COVID-19-affected country in the world, followed by UK

(14%), Italy (8%), Germany (6%), the second most severely

the COVID-19-hit countries. (see Figure 4.6) These four

countries alone share 73% of the entire export market,

meaning that Sri Lanka’s textiles and garment markets are

severely threatened by demand constrictions. Other non-EU

buyers like India, Australia, and Japan are also under threat.

Therefore, the manufacturers have to expect more and more

cancelation/delaying of orders they currently have in hand.


62



Figure 4.6: Percentage share of export destinations for the textile

and garment industry of Sri Lanka, 2019

Supply-side

• The Textiles and Garment industry in Sri Lanka comprises

some 850 factories of which approximately 26% are small-

scale industries. Fifty-one per cent are medium-scale

industries and the remaining 23% fall in the category of

large-scale industries. One hundred twenty-six factories are

located in the 12 Export Processing and Industrial Zones.

Other EU Contries,

32,890 , 4%

Belgium-, 40,820 , 4%

France, 12,133 , 1%

Germany, 55,578 , 6%

Italy, 74,465 , 8%

The Netherlands, 31,491 , 3%

Spain, 3,935 , 1% United Kingdom, 133,560 , 14%

USA, 418,216 , 45%

Australia, 13,495 , 2%

Canada, 24,451 , 3%

China, 12,047 , 1%

India, 11,510 , 1% Japan, 10,638 , 1%

Other, 55,575 , 6%




Table 4.2 : Number of garment factories and employment in export processing and industrial zones in Sri Lanka, 2020

Industrial Zone

Number of factories

Employment

EPZ - Malwatta 4 2,051

EPZ - Biyagama 23 18,202

EPZ - Katunayaka 36 25,049

EPZ - Koggala 15 12,719

EPZ - Mirigama 1 2,264

EPZ - Horana 2 397

EPZ - Mawathagama 5 5,548

EPZ - Polgahawela 4 3,742

EPZ - Wathupitiwala 10 8,833

Ind. Park - Mirijjawila 2 887

Ind. Park - Pallekale 7 7,152

Ind. Park - Seethawaka 17 18,620

Total 126 105,464

Source BOI Statistics

• According to the Sri Lanka Labour force survey 2019Q4, the

total employment of Sri Lanka is 8,181,442 out of which

nearly 20%, i.e. 400,000 workers, are currently employed in

the textiles and garment industry. Also, the industry provides

home to more than 2 million indirect beneficiaries. As

depicted in Table 4.2, approximately 105,400 workers are

employed, in the 12 export processing and industrial zones.

Complete shutdown and working with 1/3 of the labour force

caused a loss of at least 16 million labour hours per month in

the export processing and industrial zones alone. The

majority of the firms in the industry will struggle to pay

salaries from the end of April onwards with certain amounts

of pay cuts, and a considerable portion of temporary workers

losing jobs are inevitable. This would result in

underutilization of installed capacity even after reopening

the economy.

Approximately

105,000 workers are

employed, 12 in the

export processing and

industrial zones.

Complete shutdown

and working with 1/3

of the labour force

caused a loss of at

least 16 million labour

hours per month in

the export processing

and industrial zones

alone.


64



I

In some garment

factories workers are

now only paid the

basic salary.

Moreover, in the

name of making up

for lost time, (182

hours during national

lockdown) they have

to work an extra hour

per day without

additional pay.

Figure 4.7: Employment in the textiles and garment industry, 2020,

by industrial zones

• In some factories workers are now only paid the basic salary.

Moreover, in the name of making up for lost time, (182 hours

during national lockdown) they have to work an extra hour

per day without additional pay. All allowances, including the

attendance allowance, have been cut and the New Year

bonus was not paid. Brandix, which employs 47,000 workers,

has cut wages by between 5 and 30%, gutted welfare

allowances and sacked temporary workers (Wsws.org, 16

May 2020). On May 20, about 450 workers from the Everbest

garment factory at Yakkala, protested against company

attacks on jobs and wages. Owing to the financial crisis

workers in many factories would only receive half their

monthly wages in May. It is reported that some companies

have informed workers that they could “voluntarily retire”.

• There is also a threat that some multinational companies

might leave Sri Lanka for cheap labour in the near future

using the COVID-19 shock as an exit point. Hirdaramani, a

well-established manufacturer in Sri Lanka, recently opened

a new plant in Ethiopia where monthly salaries are only

USD30.

2051, (2%)

EPZ - Biyagama,

18202, 17%

EPZ - Katunayaka, 25049, 24%

EPZ - Koggala, 12719, 12%

EPZ - Mirigama, 2264, 2%

EPZ - Horana, 397, 0%

EPZ - Mawathagama,

5548, 5%

EPZ - Polgahawela,

3742, 4%

EPZ - Wathupitiwala,

8833, 8%

Ind. Park - Mirijjawila, 887,

1%

Ind. Park - Pallekale, 7152,

7%

Ind. Park - Seethawaka, 18620, 18%




There is also a threat

that some

multinational

companies might

leave Sri Lanka for

cheap labour in the

near future using the

COVID-19 shock as an

exit point.

• The COVID-19 threat in China has threatened Sri Lanka’s

apparel industry with 50 factories or more pushing to

temporary closure due to the uncertainty prevailing over the

supplies of raw materials to factories from China. Most of the

raw materials such as fabric, and accessories such as zippers

and labels are imported from China. Sri Lanka currently

imports nearly 25% of its fabric needs from China. In 2018,

Sri Lanka imported cotton worth the USD 218.1 million and

knitted/crocheted fabric worth USD 132.6 million from

China. The apparel sector imports most of its raw materials

from China. The collapse in supply chains due to the COVID-

19 following the Chinese New Year has halted raw material

production lines for the apparel sector. Although China

claims that it is back to normal the Chinese raw material

manufacturers are still struggling with limited labour

supplies, and cannot meet the world demand.

Remedial measures

Recovery in the world market is beyond our control. The following

remedial measures are recommended to sustain the supply side

until the international markets reinstate.

1. To reopen factories having pending orders in hand, subject to

health directions, as early as possible at their full capacity.

Otherwise further trade shifts may take place in favour of

competitors like Bangladesh, Cambodia, Vietnam, and

Indonesia.

2. To explore new markets in play, including those related to

new products currently in demand in Europe and North

America.

3. Government approval to extend overtime (OT) hours from

legally permitted 60 hours to 90 hours for the 3 months

beginning from June for the benefit of factories having

overdue orders in hand.

4. To grant adequate loan facilities subject to the Credit

Support Scheme referred by the Central Bank Circular No.4 of

2020 dated 24th March 2020 to ensure the working capital

finance of SMEs. According to the circular, SMEs are eligible

to receive a six-month debt moratorium and working capital

finance at 4% interest for at least 6 months backed by

refinance.


66



In presence of an

approximately LKR650

billion revenue loss

due to tax cuts

introduced following

the Presidential

election last year, as

well as the delays in

revenue collection

during the pandemic,

it will create a

significant fiscal

burden.

5. In presence of an approximately LKR 650 billion revenue loss

due to tax cuts introduced following the Presidential election

last year, as well as the delays in revenue collection during

the pandemic, it will create a significant fiscal burden for the

government alone to implement such stimulus packages.

Thus it will be essential to issue directions to the commercial

banks to grant loan facilities sufficient to pay a minimum of

two month’s basic salary for the SMEs without collateral but

under the refinancing scheme of the government.

6. To suspend of EPF/ETF deduction from employers for 6

months as a temporary relief to maintain liquidity.

4.5 Construction sector

The construction sector was one of the front-runners in the Sri

Lankan economy during the post-war era. The data speak for

themselves to prove the prominent contribution made by the

construction sector for the GDP growth of the country while many

other sectors failed to maintain consistent growth.

The industrial sector is the second-largest contributor to the GDP of

the country after the services sector. Within the industrial sector,

the construction sector is the second largest contributor where the

manufacturing sector is responsible for the lion share. To put this

into perspective, during last year (2019) the service sector

contributed to 57.4% of the GDP whereas the industry and

agriculture sector contributed 26.4% and 7% respectively.

Within the industrial sector, the manufacturing sector’s contribution

was 15.6%, whereas the construction sector contributed 69% to GDP

during the same year. According to our calculations, the

construction sector’s contribution to the GDP on average was 7%

during the last six years. Also, despite the abrupt disruptions due to

the Easter Sunday attacks last year, the construction sector was able

to maintain the growth momentum.

In terms of employment generation, the construction sector is vital

as it has been the destination of many unskilled labour force

participants of the country. According to the annual construction

sector survey published by the Department of Census and Statistics,

there are around 95,000 people who had to find their livelihood

from the construction sector.




According to the

annual construction

sector survey of the

Department of Census

and Statistics, around

95,000 people find

their livelihood from

the construction

sector.

The economic importance of the construction is not limited to the

sector itself. The operational arrangement of the construction sector

is also supporting the functioning of the other economic activities.

The construction activities are bound with other economic sectors

through their forward and backward linkages within the industry

sector such as manufacturing and mining and quarrying activities. In

addition, it also relates to other sectors such as the service sector

that supports trade and financial services. Thus, any adverse

development in the construction sector will generate adverse

multiplier effects on the economy through various channels.

Based on this backdrop, this section is dedicated to understanding

the impact of the on-going pandemic on the construction sector. In

order to make inferences, in-depth interviews were conducted with

industry experts to derive an idea about the current position of the

construction industry and possible mitigation methods to deal with

the issues arising due to the pandemic situation. In addition,

secondary data has also complied with the Central Bank annual

reports and the Department of Census and Statistics.

The current situation of the construction industry

The facts presented in this segment are primarily from the

interviews had with the stakeholders and the facts were supported

with secondary data wherever necessary. As per the information

gathered from the interviews the challenges faced by the

construction sector due to the ongoing pandemic can be categorized

into four segments as discussed below.

Human resource and labour-related challenges

With the imposition of the curfew to prevent the community spread

of the virus all construction activities were suspended. However, at

the time of the preparation of this report, many construction

projects in the country are in the process of reopening. Unlike many

other professions, working from home is not applicable to

construction activities other than the administrative work.

The physical presence of the workers in at the construction site has

become challenging. Even though large-scale operators are not

directly engaged in raw labour-related matters as they employ them

through sub-contractors, a significant proportion of the construction

companies in the country are not large-scale operators. Thus, they


68



Ensuring social

distancing and

undertaking certain

activities are

challenging and have

affected services such

as providing foods

and accommodation

facilities.

are struggling to get back many of their labourers to work. This

situation is comparatively extensive in construction projects located

in the Colombo district where the majority of workers are from the

rural parts of the country.

In addition, in line with government directions and the direction

issued by the respective companies the labour utilization in ongoing

construction projects has to reduce to meet health directions. In

some cases, the requirement is up to 25% of the previously

employed construction workers. However, one common issue that

arises due to this direction is that many construction workers are

specializing in given tasks of the entire construction. Thus, limiting

numbers may constrain the healthy function of construction

activities.

In meeting the issued health safety guidance there are challenges for

the construction sector due to the structural arrangements of the

construction projects. Ensuring social distancing and undertaking

activities have become challenges and this is especially affected by

aspects such as providing foods and accommodation facilities. While

this is costly for the companies to meet the given guidelines they

accepted to follow the guidelines given by health officials.

However, these labour-related challenges are presented here with

the perspective of the construction companies. From an economist's

point of view, the majority of workers are daily wage earners and

may not have enough savings to effectively absorb this type of

economic shock for months. Thus, their vulnerability to falling into

poverty is very high.

Raw materials

As it is with the labour the raw materials are also important

elements for the proper functioning of the construction sector. As

per the views presented by industry experts for ongoing

construction projects, the availability of the raw materials would not

be much of a challenge as they have been purchased in advance.

However, with rising manufacturing costs, exchange rate

depreciation and restrictions on imports, there will be an upward

adjustment of prices for many of the construction materials. Thus, it

will ultimately affect the overall construction cost in the future.




Many high-end

condominium projects

were facing dry

markets even before

the pandemic.

Financial difficulties

Even before the island was affected by the pandemic, the

construction sector was affected by the cash flow constraints put

forward by the delayed payments for government-funded

construction projects. Also, even some privately funded projects are

not in place to fully pay back the initial investment at this point in

time. Respondents were worried that this would affect the

consistent growth of the construction industry in the years to come.

Thus, maintaining cash flow has become a challenge to the

construction sector. This has also affected the ability to repay loans

that they obtained to fund these projects as well.

The majority of the interviewees also admitted that they could

understand the difficulty for the government to pay their deeds at

this point in time (focus group discussions, 2020). However, in order

to put the Sri Lankan economy back on track, the government’s

supporting hand is vital even for these well-performing sectors.

Within the construction industry, the condominium development

projects are given special concentration as they were one of the

main components of the private sector investment in construction

projects. Many high-end condominium projects were facing dry

markets even before the pandemic. However, the respondents had

mixed responses regarding the future of the demand expectations

on the condominium developments in the country. While admitting

that the already-completed projects cannot be offered at a lower

rate as they have already incurred the cost, some respondents were

pessimistic about the future demand of condominiums. Despite all

these negative influences, some respondents were optimistic about

the future of the condominium sector. According to them, based on

the way that the country responded to the pandemic and the

returning of Sri Lankans who were living abroad, would generate a

positive impact on the at present dry market.

Reaching contractual agreements

Almost all respondents were concerned about meeting the

contractual agreements on completion dates and the pre-estimated

costs of the ongoing projects. Admitting the delays of construction

due to curfew, they also noted that there would be issues in the

coming months. Working with fewer employees would also generate

constraints to meet the deadlines. On the other hand, as the cost is


70



The cash flow-related

issues should be

handled as soon as

possible to ensure

healthy operations;

especially the delayed

payments for

government-funded

projects should also

be looked after.

expected to raise the pre-estimated costs needs to be adjusted

accordingly, they further elaborated.

Policy options

Upon examining the challenges, the next section looks at possible

policy directions to deal with these challenges. Labour-related issues

can adhere to the involvement of the government in a way of issuing

a license or any other means for workers to reach their working

sites. On the other hand, if a second wave does not emerge in the

country, the restriction on human mobility will be gradually

released. In the medium run in site health inspection facilities would

be beneficial in large-scale construction projects to ensure a safe

working environment. Also, the majority of small scale operators

should also be looked after with financial support. The cash flow-

related issues should be handled as soon as possible to ensure

healthy operations; especially the delayed payments for

government-funded projects should also be looked after with a

formal budget passed in the parliament for the better functioning of

the sector.

4.6 Retail and consumer goods market

Around the world as well as in Sri Lanka, many markets are now

planning their exit strategies from living restrictions implemented to

flatten the curve of the COVID-19. Each government is preparing its

own pathway to “a new normal,” complete with restrictions, health-

safety protocol and changed consumer behaviours, in hopes of

restarting the economy while still keeping the virus under control.

The contribution to the GDP from the sector of retail and consumer

goods is approximately 34%, while it contributes emplacement

generation by 14%. Therefore, the retail and consumer goods sector

is also playing a vital role in the economic development of Sri Lanka.

As a consequence, in the years 2016 and 2017 Sri Lanka was ranked

12th in the Global Retail Development Index (GDRI) among 30

countries, for potential in retail investment and growth (DailyFT, Jul

30, 2020).

The retail and consumer goods sector is one of the most affected

sub-sectors of the service sector in Sri Lanka. Due to the COVID-19,

most corporations expect a recession in 2020 as well as a negative

revenue impact.




As the debtors failed

to pay back to the

companies, there is a

loss of working capital

for reinvestments.

As unemployment levels of Sri Lanka increase, and economic and

business forecasts plunge, two types of consumers are emerging.

Firstly, there are those relatively unaffected from income loss who

have similar or even more discretionary income, then there is a

second group of consumers who have had their income and

spending significantly constrained due to unemployment,

furloughing or other COVID-19-related challenges.

According to current data, demand for non-essential goods and

services will be severely hit in 2020, given the economic impact of

strict social distancing requirements. Even sales of essential items

may suffer from supply-chain disruptions.

Based on the survey data, the following points can be highlighted on

the Sri Lankan retail and consumer goods industry after the COVID-

19 pandemic:

• The sales volumes of large-scale institutions were dropped by

35% - 50% in March and April while medium and small-scale

sales volume rose by 40% in April compared with last year.

• Several large-scale institutions were trying to lower the

operational cost and were able to remain only on a 25%

profit lost.

• As the working from home concept worked only with 50% of

the staff, the production capacity of the total industry

dropped by 50%.

• As the debtors failed to pay back to the companies, there is a

loss of working capital for reinvestments. As the continued

effect of this issue, the production process of consumer

goods industry will be damaged.

• Since there will be a lack of imported items, the supply chains

of the industry are at risk.

• The total volume demanded by the hotel industry has now

totally dropped and this will lead to a profit loss in the

consumer goods industry.

• The buying patterns of the consumers are in a changing trend

owing to the income loss of consumers and unsettled

mindsets. This will sharply affect the consumer goods

industry on a negative aspect.

As a quick solution for these impacts, several trading firms have

already activated several strategies like the “direct to customer”

process and online promotion steps.


72



The corporate sector

needs to focus on

changing consumer

behaviours and life-

style patterns and

develop new

marketing plans,

including a stronger

emphasis on online

trading.

Recommendations to the government and trading firms

Short-term strategies

• Strengthen the cash flows of trading firms through working

capital loans.

• The corporate sector needs to focus on changing consumer

behaviours and life-style patterns and develop new

marketing plans, including a stronger emphasis on online

trading.

• Trading firms should look at cost saving measures in every

aspect of the value chain.

• Focus on the “direct to customer” concept.

Medium and long-term strategies

• Increase circulating money stock through interest rates to

attract customers to supermarkets.

• Continuing the ease of cost pressure through tax reliefs that

have been already granted from Dec.2019 (Income tax, VAT,

PAYEE).

• Strengthen the working capital and reinvestment through a

business loan scheme.

• Encourage import substitutions.

4.7 Private sector trade chambers involvement

The prevailing COVID-19 pandemic affects Sri Lanka along with the

rest of the world through numerous channels. Amongst health

effects, sharp declines in domestic demand, lower tourism and

business travel and disruptions in trade, production and supply chain

linkage have also taken place.

Though Sri Lanka has taken extra-ordinary measures to minimize the

impact on human lives, the disruption to the society and the

economy is unprecedented. Rather than focusing on a single sector,

it is vital to consider a range of sectors/chambers under the

umbrella of the Ceylon Chamber of Commerce.

“According to a recent survey conducted by the Ceylon

Chamber’s Economic Intelligence Unit (EIU), 49% of its

member organizations have been impacted by the new




All export sectors are

struggling with few

exemptions linked to

exports that can cater

to export of Personal

Protective Equipment

(PPE).

Coronavirus, the COVID-19). The survey focused on the

impact the virus had on businesses in Sri Lanka”

(economy.lk).

Although the pandemic has spread to all parts of the world and

affected every sector of the country, measuring of its economic

impact on businesses is difficult. However, the Sri Lankan economy

marked the lowest growth in 18 years in 2019, with 2.3% as a result

of the Easter Sunday attacks. The prevailing COVID-19 outbreak has

added more challenges to the growth outlook, with symptoms of a

contraction in 2020. Meanwhile, the CBSL expects a 1.5% growth for

2020. Despite the relief package of lower oil prices decreasing the

trend of tourism, exports and remittances are headed to widen the

current account deficit to the GDP in 2020 (CBSL, 2019). Rising

macroeconomic instability among the prolonged policy uncertainty

due to postponed parliamentary elections and rising public and

external debt sustainability challenges made fragility in business

All economic sectors are affected by the pandemic despite its scale.

All export sectors are struggling with few exemptions linked to

exports that can cater to export of Personal Protective Equipment

(PPE).

In order to identify the gravity of the pandemic in the apparel

industry, the loss in export revenue was 41% in March and 82% in

April 2020, with a USD 750 million turnover lost in just a matter of 2

months. Though the 3rd highest foreign exchange earner and the 2nd

highest net Forex earner, tourism industry recorded zero earning in

April 2020. Since tourism also has a large trickle-down effect the

impacts are much greater than what is seen on a surface level.

Consideration into the implications of the COVID-19 situation for Sri

Lankan business supply chains and markets mainly focused on

sourcing of raw material for domestic and export processing

production were severely impacted. Especially on firms which ran on

a just- in- time inventory system. Furthermore, cost structures have

also changed as some firms had to source raw materials from

alternative sources amid the prevailing pandemic situation.

Key export markets of Sri Lanka (US and EU) and import markets

(China, India) are in stressed conditions due to the COVID- 19

impact. The pandemic has also caused countries to change their

investment strategies. Similar to the investment diversions that took


74



The Ceylon Chamber

of Commerce

recommendations

form the foundation

of a synergistic private

and public sector

partnership focused

on achieving

accelerated economic

repossession in the

post-COVID-19

context.

place as a result of the trade war between the US and China, now

countries are looking to invest in new locations and businesses to

minimize risk that arises out of situations such as the COVID-19 and

natural disasters.

The Ceylon Chamber of Commerce recommendations form the

foundation of a synergistic private and public sector partnership

focused on achieving accelerated economic repossession in the post-

COVID-19 context.

Especially, they have focused on establishing a foundation for

accelerated recovery and wider adoption across the private sector in

Sri Lanka.

Recommendations for wider adoption across the private sector in

Sri Lanka:

Configuration to the Principle of Primacy for the maintenance of

livelihoods by applying innovative measures with respect to

adjustment of production and service portfolios to meet adjacent

demand in the context of crisis and post-crisis environments will

result in employment retention and creation. Besides, retraining and

redeployment of employees towards productive and value addition

tasks and vocations along with the compromise of employment to

be limited to a measure of last resort will be effective. Re-

engineering of supply and value chains with pre-eminence for

domestic supply eco-systems, central to which will be SME capacity

building and financial support, where viable. Activation of enterprise

supply chains by adopting aggressive negotiation measures with

foreign suppliers while assisting the Government of Sri Lanka in

overcoming Sri Lanka’s foreign exchange liquidity constraints will

secure preferential credit terms which extend beyond the

immediate post-COVID-19 period.

Active participation in extending private sector capacity in logistics,

fulfilment and supply chain infrastructure for the use of the public

sector will lead to bridge supply, demand and storage asymmetries

across the agriculture, livestock and fisheries sectors. Fast-track the

digitalization of operations as well as the interfaces to suppliers,

partners and domestic customers are essential. Implementation of

agile employment technologies and interfaces to enable the

engagement of casual employees and daily workers within adjusted




Henceforth, we, as a

nation, should shift

into a new normal

and cater to the

demand during new

normal and public

policies need to be

amended and the

regulatory

environment needs to

change to facilitate

new normal

environments.

work profiles and value chains, active promotion of ‘work from

home’ (WFH) practices will be beneficial.

Meanwhile, “Black Swan” events such as environmental, economic,

political, societal, or technological in nature are almost impossible to

predict and often bring massive repercussions. In the case of the

COVID-19 occurrence, traditional economic management strategies,

crisis management strategies and health management strategies are

crippled and often fail in their delivery capacity to tackle this.

Henceforth, we, as a nation, should shift into a new normal and

cater to the demand during new normal and public policies need to

be amended and the regulatory environment needs to change to

facilitate new normal environments.

The following examples provide the possibilities in different

economic sectors.

- The IT-BPO sector will have to proactively look for

opportunities to cater to digitization demand.

- Tourism will open new doors as new travel

corridors/bubbles form and more emphasis is made on

wellness tourism.

Historically, times of crisis have also been provided opportunities

for change. In the context of the COVID-19 structural re-engineering,

digitalization and transformation of key sectors are important.

Hence, the government of Sri Lanka reassure and incentivize

structural changes in the sectors of Education, The public sector,

SOE re-engineering & PPPs, Workforce & labour, Targeted &

inclusive welfare, Energy, Capital markets and the Transportation

sector.

Ensuring sufficient diversification and guidance on businesses and

diversifying across businesses will protect the business

entrepreneurs from greater losses and drive their business into

sustainability amidst the COVID-19 pandemic.


76



4.8 Travel and tourism in Sri Lanka

Sri Lanka Tourism at a glance before the COVID-19

Tourism has become one of the highly significant services sectors

and has been an engine of economic growth in Sri Lanka. Travel and

tourism contributed to the GDP of the country by 12.5% in 2018. The

tourism sector plays a significant role in the Sri Lankan Economy

where it has reached the third position in its contribution to foreign

exchange earnings. The contribution amounted to 15.9% in 2018

(SLTDA, 2018). The total earnings of USD 4.4 billion in 2018 declined

to USD 3.7 billion in 2019 (SLTDA, 2020) demonstrating the worst hit

among other top foreign exchange earners.

Though tourism continued to report a two-digit growth rate at the

end of the civil war, the growth rate has collapsed due to the Easter

Sunday attacks in 2019, causing a USD 1.5 billion loss in tourism

revenue (see Figure 3.10). However, Sri Lanka’s tourism regained

portraying an unexpected growth of arrivals due to the collective

effort by the government, security forces, the Sri Lanka Tourism

Development Authority (SLTDA), and the Sri Lanka Tourism

Promotional Bureau (SLTPB).

Figure 4.8: Tourist arrivals and earnings from tourism 2015-2019

Tourist arrivals from all major regions declined in 2019. Europe,

continued to be the largest tourist origin for Sri Lanka, reported a

decline by 12.8% in 2019, in comparison to 2018. Figure 4.8

illustrates the changing pattern of tourist arrivals as well as the

revenue from tourism over the last five years. The continuous

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

0

500

1000

1500

2000

2500

2015 2016 2017 2018 2019

Re

ven

ue

USD

mill

ion

Source: SLTDA

Tourist arrivals

Revenue




The COVID-19

outbreak and the

Easter Sunday attacks

have shown that the

tourism and

hospitality industry is

vulnerable to external

and internal shocks.

increase in both arrivals and revenue has shown a decline in 2019

due to the impact of the Easter Sunday attacks.

The tourism industry continued to attract a significant investment in

2019 despite the setback in tourist arrivals as a result of the Easter

Sunday attacks. The Investor Relations Unit (IRU) of SLTDA has

granted approval for 59 hotel projects in 2019 to add 2,237 hotel

rooms to the existing capacity. Furthermore, new proposals worth

US dollars 189 million for 132 hotels were referred to the IRU in

2019 in order to improve the accommodation capacity by a further

2,584 rooms in the industry (CBSL, 2019).

Several policy measures and numerous promotional campaigns were

implemented in 2019 to enhance the potential of Sri Lanka’s tourism

industry with special activities such as relief packages and a debt

moratorium for stakeholders in tourism. Furthermore,, the SLTPB

carried out 59 travel and tourism fairs and 18 road shows giving

opportunities to local travel organizations to create direct business

relationships (CBSL, 2019). The COVID-19 outbreak severely affected

the industry while many parties were resilient to the Easter Sunday

attacks.

The Effect of the COVID-19 on Sri Lanka’s Tourism

“Tourism has been hit hard, with millions of jobs at

risk in one of the most labour-intensive sectors of

the economy” UNWTO (2020).

According to the provisional estimates of UNWTO, a loss of 67

million international arrivals and about USD 80 billion in receipts is

expected all over the world. The UNWTO further exemplifies that

Asia and the Pacific is at the highest risk with a loss of 33 million

arrivals. Sri Lanka, as an Asian destination, was hit hard by the

COVID-19 pandemic.

The COVID-19 outbreak and the Easter Sunday attacks have shown

that the tourism and hospitality industry is vulnerable to external

and internal shocks. Due to the worst condition of the COVID-19, all

tourism-related industries, businesses and individuals are

experiencing zero revenue without any hope for the next 2 - 3

quarters.


78



The COVID-19

outbreak severely

attacked the tourism

industry while many

parties were resilient

to the Easter Sunday

attacks.

Table 4.3: Monthly tourist arrivals to Sri Lanka from January 2019

to March 2020

Month 2019 2020* % Cha. 2019/20

January 244,239 228,434 (6.5)

February 252,033 207,507 (17.7)

March 244,328 71,370 (70.8)

April 166,975 --- ---

May 37,802

June 63,072

July 115,701

August 143,587

September 108,575

October 118,743

November 176,984

December 241,663

Source: SLTDA

As Table 4.3 illustrates, tourist arrivals declined rapidly from January

2020 to April 2020. Consequently, there were no arrivals at all in

April since the Sri Lankan government decided to close down the all

channels of tourist arrivals while travel bans were imposed on all

source markets, as well. Travel bans, suspension of flights and

curfew regulations have very much affected the tourism sector not

only Sri Lanka but the many other countries also. According to ADB

estimates, until March 2020, the decline in tourism revenues for Sri

Lanka could range from USD 107 million to USD 319 million.

However, during April 2020 there was a loss of total income from

tourism since the arrivals dropped to zero. It was around USD 29

million for the month of April.

Tourism significantly contributes to labour force participation

directly and indirectly. Total employment was around 5% of total

labour force participation in Sri Lanka in 2019 (author calculations).

Almost all these employees are vulnerable to the COVID-19

outbreak. The COVID-19 impact severely affected the livelihood of

both types of employees. Almost all the investors are currently

experiencing zero income due to the COVID-19 outbreak while they

are maintaining their permanent employees paying just their basic




Direct and indirect

employment in

tourism sector is

approximately 5% of

total labour force

participation in Sri

Lanka. Almost all

these employees are

vulnerable to the

COVID-19 outbreak.

The COVID-19 impact

severely affected the

livelihood of both

types of employees.

salaries. Entire contract basis employees have lost their jobs in the

sector and it is around 95%. The livelihood of indirect employees

such as retail sellers, tour guides, safari drivers was totally lost due

to the COVID-19 and some of the tourism establishments already

laid off their temporary and casual staff. Salary freeze was

introduced and is continuing while some other organizations started

to reduce the salary at different percentages (TD1).

According to the information revealed by discussants, approximately

20% of direct employees will lose their jobs in the post-COVID-19

period and will not be able to find new jobs under the current

situation in the country. Therefore, these individuals are the most

vulnerable to the COVID-19 impact (TD1). The situation will worsen

further since the hoteliers and destination management companies

have warned that they will have to lay off a considerable number of

staff if the COVID-19 pandemic continues.

All the national parks have been closed since March 2020, up to the

final date of the researcher’s discussions. Tour guides, jeep drivers,

guesthouse owners, and many others who are dependent on

tourism for their livelihood have been severely affected due to the

COVID-19 outbreak and the per day loss of the tip value is around

LKR750 other than the regular salary (TD5). Loss of the income for

guesthouse owners cannot be calculated exactly by a sample, since

it depends on the many factors such as number of beds occupied,

seasonal effects.

Women who are attached indirectly to the tourism sector are the

most vulnerable in the industry’s workforce in Sri Lanka. As revealed

by the informants, tourism is labour-intensive as pointed out by the

UNWTO and a leading part of the workforce in Sri Lanka is the young

people and amounts to over 70% of the workforce (TD1&2) and

their livelihood is hit hard by the COVID-19.

The Government of Sri Lanka considers tourism as a key sector of

the economy and thus, has planned USD 7 billion of the income with

4 million tourist arrivals and has planned to upgrade 75,000 graded

accommodation capacities (BOI, 2019). Following the investment

policy and the strategic plan of the SLTDA and the Sri Lankan

government, a huge investment has made giving special reference to

accommodation through bank loans. However, even though the

government has given a concession for repaying loans, investors of

travel and tourism are in financial distress with zero income and no


80



Following the

investment policy and

the strategic plan of

the SLTDA and the Sri

Lankan government, a

huge investment has

made giving special

reference to

accommodation

through bank loans.

The investors of travel

and tourism are in

financial distress with

zero income and no

hope for a further six

to nine months’

period for their

income (TD1&3).

hope for a further six to nine-months’ period for their income

(TD1&3). Some of the investors are reluctant to go ahead with these

concessions and are ready to foreclose the mortgages and close

down the business due to the existing circumstances. The biggest

challenge that investors are facing under the current crisis is that

lenders (particularly the banks that provided huge loans for

investment) are rejecting the foreclosing of mortgages since banks

are also in danger (TD1).

Accommodation providers have cut down all promotion campaigns

and online bookings reached zero. It is impossible for businesses in

the tourism sector to recover on their own (TD2). In this context,

investors are seeking more flexible remedies from the government

and banks to protect the industry and the livelihood of the

individuals who are attached to tourism directly and indirectly (TD2).

According to the stakeholders it is not possible to expect a growth in

the tourism industry for the next 2 - 3 quarters. This may be due to

air travel restrictions and mainly the need for maintaining social

distancing and other health precautions. Stakeholders believe that it

will take two more years to experience normal conditions since the

COVID-19 has no vaccine invented yet and a second wave is

expected from other countries. Social distancing and health

precautions will remain the current situation for a further one year if

the second wave of the COVID-19 does not emerge (TD3&4).

Though some of the employees were eligible for government

subsidies, small-scale stakeholders are finding it hard to earn enough

to recover their investments. For example, safari jeep owners would

like to sell their vehicles since there is no immediate hope about the

industry, but this is not possible because safari jeeps cannot be

utilized for any purpose other than the planned activity (TD4 & 5).

Most of the jeep services are financed through leasing facilities and

thus, the owners are struggling to pay the instalments due to loss of

income. These stakeholders are not satisfied with the remedies

given by the government in terms of loan moratorium and they are

expecting more flexible repayment schemes which are adjustable

regarding the potential growth of the industry (TD5&6).

Almost all the individuals from labourer to five-star hotel owners

have been severely affected by the COVID-19 outbreak and the

impact is much higher than any other economic sectors due to the

perishable nature of the industry.




Safari jeep owners

would like to sell their

vehicles since there is

no immediate hope

about the industry,

but this is not possible

because safari jeeps

cannot be utilized for

any purpose other

than the planned

activity.

The president’s dream of attracting six million tourists by 2025 and

earning USD 10 billion in income is dubious due to the COVID-19

impact and furthermore, the target of achieving 3.5 - 4 million

tourists and earning USD 5 billion in 2020 has a very low probability

of success with the rapid the COVID-19 outbreak around the world.

Challenges and the way forward

It is not possible to recover the tourism sector in a country on its

own but with all other countries collectively. As a popular tourist

destination, Sri Lanka can achieve this, however it needs its own new

travel and tourism strategies and policies. The policies should

provide protection to both stakeholders involved in the tourism

industry and visitors. Stakeholders need protection for their financial

distress while visitors must be protected in terms of health

conditions.

The stakeholders who invested in tourism in terms of lands, hotels,

restaurants and vehicles are in a financial crisis and are in a hazard in

terms loan repayment and payment of salaries for permanent

employees. The government has already declared some defensive

activities such as issuing of a debt moratorium on capital and

interest payments on debts. Investors are not satisfied with the

existing provisions and are in quest of somewhat flexible responses

from the government and banks. Furthermore, there is no guarantee

for the period of loan moratoriums. Therefore, there should be a

financial strategic plan for both parties and flexible discussions and

close consultations are required before the strategic planning for

recovering the pain of loan repayments. Thus, the first effort should

be to retain the existing investors in the industry, rather than

attempting to attract new investments.

According to past experience, foreign travellers are highly safety-

sensitive. The burgeoning of tourism after the Easter Sunday attacks

was clearly due to the provision of the safety brand of the country.

Similarly, individual travellers will expect to know about Sri Lanka’s

COVID-19 safety status after reopening the country for foreign

visitors. Thus, the government of Sri Lanka needs to play a vital role

in establishing a trustworthy COVID-19 safety statement regarding

travel and tourism. Therefore, quick and effective risk management

protocols are required to establish in terms of restoring visitor

confidence that Sri Lanka is safe and in a normal condition as a

destination for foreign visitors. Authorities will be able to handle


82



The first effort should

be to retain the

existing investors in

the industry, rather

than attempting to

attract new

investments.

social media in this context. This endeavour further helps to recover

the other important sectors of the economy affected by the COVID-

19. The entry restrictions for some source countries who are

experiencing more vulnerable conditions of the COVID-19, a

quarantine process for visitors and changes on visa issuing processes

for foreign travellers- example; automated visa issuing technology,

could be introduced.

There are substantial positive and negative effects of “word of

mouth” in tourism. Therefore, the government of Sri Lanka must

initiate a suitable mechanism to absorb the positive effects of word

of mouth of the early post-COVID-19 visitors to Sri Lanka.

One of the foremost challenges to Sri Lanka will be the destination

competition within the South Asian region. At the other end,

travellers will seek low-budget travel plans. Therefore, Sri Lanka’s

tourism will have to offer considerably low-budget plans in their

promotions, compared to other Asian countries. Hotels and other

travel and tourism-related organizations will have to operate on

their Break-Even point in their businesses at the beginning of new

era after the COVID-19 and gradually increase the profit margin. In

this process the, Sri Lankan government has to take care of all the

travel and tourism-related organizations providing necessary

subsidies with a long-term plan to recover the industry.

It is believed that resuming probability of business travel will be

higher than leisure travel after a crisis and thus, business travel

improvement must be in the priority in policy-makers’ agenda and

government intervention may be highly effective in this endeavour.

Many countries regulate the tourism industry introducing new

policies and strategies for travel and tourism. Therefore, Sri Lanka

cannot expect as many visitors from its source markets as before.

The promotion of domestic tourism will be a valuable alternative for

regaining the industry since domestic demand is expected to recover

sooner than international demand, according to the UNWTO Panel

of Experts survey.

Policy-makers are advised to follow up the UNWTO

recommendations since Sri Lanka, as a destination, depends on the

European market, as well. The UNWTO presented three different

scenarios based on the removal of travel bans and then lockdown

situation and opening of borders in source markets. Figure 4.9




illustrates these scenarios. Accordingly, the travel and tourism sector

will start breathing in the second and third quarters of 2020, and

most probably, will be normal in 2021.

Figure 4.9: Regaining of travel and tourism in the world

Source: UNWTO

4.9 Government revenue collection

In contrast to the well-established neoliberal hegemony of minimum

state involvement in the economy, the spread of the COVID-19

pandemic paved the way to intensify the role of government

operations in an economy, especially at a time of unexpected shock.

In Sri Lanka, where the state footprint in the economy has become

common practice, extensive action was taken by the government to

prevent the community spread of the virus. On the other hand,

considering the disruptions to livelihood of the general public, steps

were taken to provide financial transfers as a supporting system for

low-income earners. In addition, the public sector employments of

around 1.4 million were also maintained without laying off and

paying salaries even though most of the institutions were not full

operation. All these facts were presented to infer that the

government expenditure would have a considerable upsurge due to

the COVID-19.

However, even before the pandemic affected the fiscal sentence of

the country, Sri Lanka had been suffering from weaker fiscal


84



Even before the

pandemic, Sri Lanka

has been suffering

from weaker fiscal

conditions for years.

The lower direct tax

revenue coupled with

the mounting

government

expenditure the

country has been

suffering from a

prolonged fiscal

deficit which in turn

transformed to a

higher levels of

indebtedness.

conditions for years. The lower direct tax revenue combined with

the mounting government expenditure the country has been

suffering from a prolonged fiscal deficit which in turn transformed to

a higher levels of indebtedness to both domestic and foreign

sources.

On this backdrop we investigated on how this already apprehensive

condition would be affected through the pandemic and the

economic disruptions that followed in the country.

The impact of direct tax collection

Before moving on to discuss the findings of the interview, it should

be noted that the trends and patterns of government revenue in

2020 is not only affected by the COVID-19 pandemic. Following the

8th presidential election of the country, some key reforms were

introduced to the Inland Revenue Act, 2017. Deviating from the

initial motive of the act - the revenue- based fiscal consolidation, the

new amendments were put in place with the aim of stimulating the

demand-side factors to improve the sub-par economic growth in the

country during the recent past.

These policy measures included policy options such as reduction of

value-added tax (VAT) to 8%, and the abolition of the Nation

Building Tax (NBT) and Withholding Tax (WHT), as well. In addition,

the income tax threshold level was also adjusted upward to LKR

250,000 per month and the Pay as You Earn (PAYE) tax was

removed. While these measures would help to stimulate the

demand in the short run, these expansionary fiscal policy measures

have negative implications on the entire government revenue

collection process.

Thus, when the COVID-19 impact on government revenue is

considered, these policy changes and their impact should also be

adhered to, to derive a clear picture.

According to the findings of the interview, data for the first quarter

of 2020 may actually indicate the substantial effects of the above

policy changes whereas the real impact of the economic disruption

due to the COVID-19 would be felt within the next quarter.

Therefore, the comparison of the revenue figures of the 1st quarter

of 2019 and the 1st quarter of 2020 without accounting for the

expansionary fiscal policy measures mentioned above would




The two months, April

and May, when the

COVID-19 was

prominent in the

country, are months

collecting a high level

of tax revenue for a

normal year in Sri

Lanka’s tax calendar.

generate misleading inferences. However, to get an overall idea

about the possible implications, we will consider the latest available

data, as well.

Figure 4.10: Distribution of monthly revenue collection in 2018

First, we will examine the monthly revenue collection data to get a

basic idea of the distribution of tax collection during a period of 12

months. As the data indicates, the revenue collection is not equally

distributed throughout the year (see Figure 4.10). Our attention is

mainly on the second and third quarters of the year, as we expect

the COVID-19 impact to be felt immediately during this time. The

two months, April and May, when the COVID-19 was prominent in

the country, were months that the revenue generation is usually

high. Then in August and, September the revenue collection goes up

again. The reasons for this behaviour lie on the tax calendar of the

country, as pointed out during the interview. According to the tax

calendar, in April, the quarterly VAT for the first three months of the

year is paid. In the following month, one instalment of income tax

payment is made. (This is with respect to the 1st quarter of the

year).

However, as we argued above, the real impact of the COVID-19

disruptions will be shown in the next quarter of the year as

emphasized in the interview as well. The 15th of August marks

another important day in the tax calendar where the second

instalment of the income tax needs to be paid, and in September,

where any amount left in the income tax is settled. Therefore, these

two months also record a higher level of revenue, compared to

other months. It would be impossible to provide a complete picture

at the time of writing this report and we will have wait for a few

more months.

0

10

20

30

40

50

60

70

80

90

100

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Rs.Billion 78 80 61 78 73 56 70 83 81 78 92 63

Bil

lio

ns

of

LK

R


86



As a result, all three

contributors to VAT

namely,

manufacturing sector,

the Non-

manufacturing sector

and imports, will be

adversely affected

due to the COVID-19

pandemic.

The cumulative tax revenue of the government during 2018 was LKR

893 billion, whereas it went down to LKR 785 billion in 2019. As per

the targets given for 2020, further reduction is expected with the

given tax concessions. Therefore, the declared revenue target for

2020 is LKR 613 billion, and it is more likely that the IRD may not be

able to reach the aforementioned target with all the complications

during the first few months of the year.

Figure 4.11: Percentage distribution of tax revenue of Sri Lanka-

2019

Next, we will investigate the tax structure in order to understand

how it will be felt on the direct tax and indirect tax collection. The

data illustrates the prolonged structural issue in the fiscal policy. For

instance, during 2018, more than 50% of the revenue has been

collected through VAT, whereas the income tax revenue was only

29%. The 12% contribution to the total revenue that came from the

NBT will not be there any more, as it has been abolished as noted

above (see Figure 4.11).

Even within the VAT, the three main contributors are the

manufacturing sector, the Non-manufacturing sector and imports.

While the COVID-19 adversely affected the first two sectors,

macroeconomic complications generated through the pandemic

directed the government to impose restrictions on imports. As a

result, all three contributors to VAT will be adversely affected due to

the COVID-19 pandemic.

In terms of direct tax collection, the abolition of PAYE tax and

upward adjustment of the threshold levels following the presidential

Income Tax 29%

VAT 51%

NBT 12%

Economic Service Charge

6%

Other 2%

Income Tax VAT NBT Economic Service Charge Other




Many new tax files

were opened using

the platform during

the curfew period

when people were

unable to reach the

Inland Revenue

Department

physically.

Furthermore, almost

one third of all

previous operations

are now taking place

through this

Alternative Tax

Payment System

(ATPS).

election in last year combine with the economic shock of the COVID-

19 are likely to have a sizable impact on the overall revenue of the

government. According to 2018 data, there were around 0.7 million

individuals who were registered for the PAYE tax in the country.

However, with the new tax amendments mentioned above

considerable portion of the above taxpayers will not be eligible pay

income tax under new income tax threshold level. While the number

of income tax payers would decline, the contribution coming from

the cooperate taxes would also see a decline as a result of the

reduction of cooperate tax rate to 24% from previous 28%. This

reduction in the cooperate tax rate would not bring down the total

amount of cooperate taxpayers, nevertheless the absolute amount

of the revenue generated through the cooperate tax would go

down. As the cooperate performance are adversely affected by the

COVID-19 pandemic lower cooperate profits would further reduce

the revenue generated from the cooperate tax.

However, showing a silver line in the dark clouds: The importance of

adopting technology into the revenue collection process is proven

very important during this period. As findings of the interview

suggest, even though some services such as registration for tax, was

facilitated on the digital platform even prior to the pandemic, the

Inland Revenue Department took immediate action to establish an

online platform to facilitate the tax collection and administrative

services as well. This platform became very useful during this period.

Many new tax files were opened using the platform during the

curfew period when people were unable to reach the Inland

Revenue Department physically. Furthermore, almost one third of all

previous operations are now taking place through this Alternative

Tax Payment System (ATPS). Given the flexibility of operations and

all other advantages of the online service, the online platform is

expected to expand in years to come.

Overall, with the existing data, providing a clear picture on the

COVID-19 impact on the government revenue generation is

impossible. However, given that the government has been suffering

from fiscal deficit for so long, planning should be made for

expenditure rationalization and prioritization of the expenditure. On

the other hand, the government should look for alternative ways to

curb the negative impact of lower revenue by managing state-

owned enterprises such as the Ceylon Petroleum Cooperation (CPC)


88



Even before the

pandemic started in

the country, the

banking and financial

sector was performing

below its potential.

and the Electricity Board to make profits and to minimize the

negative impact of the revenue loss.

4.10 Banking and finance sector

The policies to re-energize the Sri Lankan economy in the post-

COVID-19 period have recognized the banking and finance sectors to

be a vanguard force in reshaping the Sri Lankan economy in the

post-COVID-19 period. As a result, policy directions have been issued

to financial institutions to impose numerous financial stimulus

packages to facilitate the smooth functioning of the economy. On

the contrary, the scope of this chapter is not to investigate such

policy stimulus but to identify the impacts of the ongoing pandemic

on the banking and financial sectors of the country.

The relative importance of the financial sector in the Sri Lankan

economy

Financial, insurance, and real estate activities including ownership of

dwellings together contributed 14.2% to the overall GDP of the

country during 2019, which was the second-largest contributor to

the GDP in the services sector after wholesale and retail trade.

According to the latest available annual data, the total assets

holdings of the financial sector of the country was dominated by the

banking sector with 71% of total assets while other deposits taking

financial institutions and specialized financial institutions were

holding 8.2% and 1.4 % of total assets of the financial system,

respectively. As the latest annual report of the Central Bank

highlights, in line with the subdued economic activities of the

country in last year, the financial sector performance was also

affected during 2019 which factor emphasizes the point that even

before the COVID-19 pandemic, the subdued economic activities of

the country was affecting the financial sector as well. Thus, a key

point that needs to be kept in mind before going to any further

discussion is that even before the pandemic started in the country,

the financial system was performing below its potential.

It should be noted here that considering this relative importance of

the banking sector within the financial sector, the pandemic impact

analysis pays attention to the banking sector.




The profitability of the

banking sector was

also deteriorating

during last year, as

reflected through the

decline of the Return

on Assets (ROA) and

Return on Equity

(ROE) ratios.

The COVID-19 impact

As a result of the subdued performance of the economy during the

previous year, the quality of the assets of the banking sector was

adversely affected by lower demand for loans and increasing Non-

Performing Loans (NPL). This led to the deterioration of the quality

of the assets of the banking sector that year. As the economic shock

of the pandemic unfolded on the Sri Lankan economy, this would

further escalate as major sectors of the economy such as

construction and tourism are expected to show underperformance

in the post-COVID-19 period.

Accordingly, the profitability of the banking sector was also

deteriorating during last year, as reflected through the decline of the

Return on Assets (ROA) and Return on Equity (ROE) ratios. Apart

from the quality of the declining assets, the rise in operating cost

and increase in taxes also fuelled this change.

The assets composition of the banking sector is dominated by loans

and advances, followed by investments. On the other hand, the

liability structure is dominated by deposits from customers, followed

by bank borrowings. Even though we could not come to a decision

on the COVID-19 pandemic impact on the financial sector by looking

at these numbers, it is possible to understand the likely impacts by

looking at these key assets and liability components.

Table 4.4: The percentage composition of assets and liabilities in

the banking sector

Assets 2018 2019

Loans and Advances 65.2 64.9 Investments 22.7 23.9 Other 12.1 11.2

Liabilities Deposits 72 73.2

Borrowings 15 13.4

Capital Funds 8.7 9

Other 4.3 4.4 Source: CBSL annual report (2019)


90



On one hand, new

investments will be

affected, limiting the

demand for credit in

the future, on the

other hand, the ability

to repay the already

obtained loans also

has negative

prospects. These

likely implications

would have duel

impacts on the

banking sector NPLs.

Figure 4.12: Composition of loans and advances of the banking

industry (2019)

The sector-wise composition of the loans and advances of the

banking sector provides a clear view that there will be a significant

impact on the quality of the assets of the banking sector, as many of

the borrowing sectors such as consumption, construction,

manufacturing, and tourism sectors, are likely to experience the

adverse economic implications of the pandemic in the short and

medium terms.

As such, sector performances are likely to stagnate. On one hand,

new investments in these sectors will be affected, limiting the

demand for credit in the future, on the other hand, the ability to

repay the already obtained loans also has negative prospects. These

likely implications would have duel impacts on the banking sector

and the financial sector at large, which is the increase in the NPLs of

the bank’s balance sheets, and which would be affecting the quality

of the assets of the banking sector, while lower investments in the

sectors mentioned above would limit the growth credit in the

country, limiting future growth prospects as well.

However, what is more worrying is that even before the pandemic

began, the banking sector was experiencing increasing NPLs in their

balance sheets due to the economic disruptions that took place

during the previous year. These rising NPLs would affect the

soundness of the financial system. Further, the credit ratings of the

banking sector were downgraded by the rating agencies in the

recent past.

Consumption 23%

Construction 20%

Wholesale and retails 18%

Manufacturing 13%

Infrastructure development

11%

Agriculture,forestry & fishing

10%

Tourism 5%

Source : CBSL annual report (2019)




Despite all these

negative prospects

the digital banking

segment was proved

to be important,

especially during the

time of the lockdown.

The cashless mode of

payment and online

banking became

prominent and even

the technology-driven

alternative self-

banking practices

instead of the

traditional practice of

over the-counter

banking became

significantly

important.

For example, in March 2020, the Fitch ratings revised the outlook of

Sri Lanka’s banking sector to negative, based on the reasons outlined

above, and in line with the sovereign ratings of the country to

'B-'/Negative from 'B'/Negative on 24th April 2020. However, this

step was condemned by the Central Bank, reemphasizing Sri Lanka’s

ability to maintain the credibility of repaying its debt. Thus, on 10th

June, the Fitch rating revised the National Long-Term Ratings of Sri

Lankan financial institutions following the recalibration of the

agency's Sri Lankan national rating scale. Thus, credit ratings of

eleven financial institutions in the country saw an upward

adjustment in their ratings. Fitch also highlighted that revision of

ratings are used to modify ratings for reasons that are not related to

credit quality in order to reflect changes in the national rating scale.

Thus, the risk of rise in NPLs by the end of the year is expected to

have a larger impact on banks and financial institutions with smaller

portfolios and with greater exposure to retail and SME accounts.

With all these negative prospects the digital banking segment was

proved to be important, especially during the time of the lockdown.

The cashless mode of payment and online banking became

prominent and even the technology-driven alternative self-banking

practices instead of the traditional practice of over the-counter

banking became significantly important during this period. This

adjustment of customer behaviour to more technology-driven

banking practices signals the future of banking in the country and

possibly shows the need for investing in this segment for the rest of

the players in the financial sector, as well.

Regulatory measures

The Central Bank being the main regulatory authority of the financial

sector took action to ensure the soundness of the financial system

as well as to ensure the availability of funds for the private sector, at

the same time.

The conduct of the monetary policy was towards the market-friendly

monetary policy sentence in the recent past, admitting the slower

growth of credit demand. As a result, the policy rates were adjusted

downwards expecting the banks to follow suite. However, lending

rates of the banks were not brought down by the banks, which led

to no significant change in credit to the private sector. In fact, as

market analysts indicate, these excess funds were used by the banks

to invest in government securities to improve their assets quality.


92



Central Bank will

provide funding to

Licensed Commercial

Banks (LCBs) at the

concessionary rate of

1.0% against the

pledge of a broad

spectrum of

collateral, on

condition that LCBs in

turn will on-lend to

domestic businesses

at 4.0%

As an initial remedial measure the Central Bank introduced a LKR 50

billion refinancing facility to help affected sectors of the economy.

The eligible sectors were identified as Small and Medium-term

Enterprises (SMEs), tourism, exports, imports-related business and

self-employments. This facility includes debt moratorium for up to 6

months for both individual and business loans. Also it includes new

provisions for NPLs as well. While some of the benefits of the

packages were not achieved, some measures were used by fixed

income earners who had no disruptions to their income source, and

also enjoyed the benefits.

As the result of the discussion had with the president, the Central

Bank again took action to further reduce the policy rates, allowing

excess cash into the system. Consequently, the Statutory Reserve

Ratio (SRR) was adjusted downward to by 200 basis points to 2%,

with effect from the reserve maintenance period that commenced

on 16th June 2020. This reduction is expected to inject approximately

LKR 115 billion of additional liquidity to the domestic money market,

enabling the financial system to expedite credit flows to the

economy.

Furthermore, according to the provisions in Section 83 of the

Monetary Law Act No. 58 of 1949, a new credit scheme was also

introduced on 16th June 2020 Accordingly, in addition to the already

disbursed LKR 27.5 billion under the refinance scheme introduced on

27th March 2020, the Central Bank will provide funding to Licensed

Commercial Banks (LCBs) at the concessionary rate of 1.0% against

the pledge of a broad spectrum of collateral, on condition that LCBs

in turn will on-lend to domestic businesses at 4.0%, while ensuring

the greatest possible distribution of this facility.

In addition, addressing the delayed payments for the construction

sector by the government: Construction sector enterprises will be

provided with a facility to borrow from LCBs, using guarantees

issued by the government equivalent to the amount due on account

of contracts carried out in the past.

However, this move alone will not ensure economic benefits of the

availability of the excess cash in the system unless steps are taken to

ensure the benefits of these policies spill over to the public. If not,

like in all the other cases, the banks will play out with the

concessions for their own benefit at the cost of national economy.

On the other hand, with the reduction of interest rates it will be




The investments in

technology-driven

banking practices

would benefit

financial institutions

in the post-COVID-19

period as people get

used to the new

normal situation.

difficult to attract foreign investors to the bond market, which will

generated unnecessary complications, as well.

Also banks were given the chance to draw down the capital buffers

to ensure the credit flow of the financial system while the relaxation

of NPL clarifications was expected to bring flexibility into bank

balance sheets. However, with the loan moratorium measures and

other measures imposed on the banking sector, a further decline the

profitability of the banking sector is expected.

In conclusion, the banking sector is absorbing adverse effects from

not only the ongoing pandemic but also the negative impacts of

subdued economic activities during the previous year. On this

backdrop, the sector is expected to experience a worsening balance

of payment conditions. The lower credit growth and the possibility

of rising NPLs would affect the quality of the assets and the liability

structure of the banking system. However, the investments in

technology-driven banking practices would benefit financial

institutions in the post-COVID-19 period as people get used to the

new normal situation.

4.11 Government relief package and its implications

On March 23rd, the government issued directives to the Central Bank

Governor, all ministry secretaries, chief secretaries of Provincial

Councils, heads of all banks and leasing companies to grant these

relief measures to the people.

The following list includes salient relief measures rearranged to

reflect the responsible parties

Treasury/Government/Inland Revenue

• A grace period for the payment of income tax and VAT,

driving license renewal fee, water bills and assessment tax

less than LKR 15,000, be extended until 30th April 2020.

• The LKR 20,000 allowance for the graduates chosen to follow

the training at divisional secretariats will be credited to their

bank accounts.

• The Agrahara insurance benefits for health workers engaged

in Coronavirus prevention activities, (the Police, Civil Security

personnel and other government employees) to be doubled.


94



The Government of

Sri Lanka donated

USD 05 million to the

SAARC COVID-19

Emergency Fund.

• VAT exemptions were granted to Lanka Sathosa and

cooperative stores.

• In the face of the current COVID-19 threat, the Bank of

Ceylon has opened a special account at the Presidential Fund

to provide relief for health and social care. LKR 100 million

has been allocated from the Presidential Fund for this

purpose. Tax and foreign exchange control restrictions have

been lifted for all local and foreign donors who contribute.

• The Government of Sri Lanka donated USD 05 million to the

SAARC COVID-19 Emergency Fund.

• A household transfer payment of LKR 5000x2 was made to

economically deprived families.

Samurdhi Authority

• The Samurdhi Authority should issue title certificates to

Samurdhi and low-income families immediately for issuing

nutritious food items to persons of low income. They should

be provided with rice, dhal and salt on a weekly basis with

their food cards.

• Samurdhi beneficiaries and Samurdhi card holders to be

offered an interest free advance of LKR 10,000 through all

Samurdhi Banks.

Central Bank and other banks

• Monthly credit card bills less than LKR 50,000, to be

extended until 30th April 2020.

• Suspend the leasing loan repayment of three-wheeler

owners for a period of six months.

• Suspend the recovery of loans from the salaries of

government employees and private sector employees until

30th May 2020.

• Suspension of loan repayments for personal loans less than

one million borrowed from banks and finance companies for

three months.

• A six-month debt moratorium will be granted to the tourism,

apparel and SME for which the Central Bank will bear the

cost of the moratorium.

• The Bank of Ceylon, People’s Bank, National Savings Bank, Sri

Lanka Insurance Corporation, Employees Provident Fund and

Employees Trust Fund to jointly invest in Treasury Bonds and




The transfers to

households, which

accounts for 18% of

recurrent expenditure

for a normal fiscal

year, would have

increased by nearly

2% this year.

Bills, thereby stabilizing the money market at a 7% interest

rate.

• A maximum of 15% interest rate has been stipulated for

credit card domestic transactions up to LKR 50,000 and a

50% reduction in minimum monthly charges.

• All bank branches to remain open during non-curfew hours

providing maximum service to customers.

Impact on government budget

In 1999 the government introduced two rounds of fiscal stimulus.

The first is to stimulate the economy slowed down by the Easter

Sunday attacks. The second is to ease measures promised at the

Presidential Election 2019. The most significant proposals among the

first round included the reduction of the VAT rate from 15% to 7%

on hotels and tour operators, to support the restoration of the

tourism industry and tax exemptions on imported security

equipment subsequent to the Easter Sunday attacks. The second

round of fiscal easing included amendments to the Inland Revenue

Act, No. 24 of 2017, introducing a broad-based reduction of the VAT

rate to 8%, except for financial services; and removal of the Nation

Building Tax (NBT) and Withholding Tax (WHT). Furthermore,

revisions were introduced to personal income tax rates, tax-free

threshold and tax slabs with effect from 1st of January 2020.

Following the tax reforms, tax revenue declined to 11.6% of the GDP

in 2019 from 11.9% of the GDP in 2018 as a result of the lower

revenue collection from excise duties, VAT, SCL, Cess, and PAL

despite a significant increase in revenue collection from income

taxes. (Central Bank Annual Report 2019, 118)

As a result of the several health policy and fiscal measures

introduced by the government in response to the spread of the

COVID-19 pandemic, including the unexpected allocations for health

facilities, imposing price ceilings for essential food items and

facilitating the distribution of food items, relief funds, strengthening

social nets, doubling household transfer payments during periods of

lockdown, the fiscal position of the government weakened further.

The transfers to households, which accounts for 18% of recurrent

expenditure for a normal fiscal year (see Figure 4.13), would have

increased by nearly 2% this year.


96



The government

continued to print

money in substantial

amounts. For the two

months’ period from

1st March to 30th April

2020, Treasury Bill

holdings of the

Central Bank has risen

from LKR 78 billion to

LKR 291 billion, which

means that the

government has

printed money more

than LKR 200 billion.

Source CBSL; Annual report 2019

Figure 4.13: Composition of government recurrent expenditure -

2019

During the COVID-19 pandemic, tax collection delayed. As a solution

to the government liquidity problem, the government continued to

print money in substantial amounts. For the two months’ period

from 1st March to 30th April 2020, Treasury Bill holdings of the

Central Bank has risen from LKR 78 billion to LKR 291 billion, which

means that the government has printed money more than LKR 200

billion within two months, threatening the price stability of the

country for the 2nd quarter of 2020. However, this helped to sustain

the aggregate demand at the required level to keep the economy on

the move in a distress situation where the vast majority has lost

their income sources.

Impact on Sri Lanka Severing Credit Ratings

Standard and Poor’s and Fitch ratings, the international rating

agencies, downgraded Sri Lanka sovereign credit ratings to B-.

On 24th April 2020, in the downgrading statement, the Fitch Ratings

reports that they expect the COVID-19 outbreak to push Sri Lanka’s

economy into a recession in 2020, against earlier expectations of a

rebound. This would weaken Sri Lanka’s already-fragile fiscal

position. Some progress in the government budget had been made

under an International Monetary Fund programme but the process

had been hampered recently. Instead of waiting for a cyclical

recovery to take place after a currency collapse in 2018, Sri Lanka

Interest payments

[PERCENTAGE] transfers to public

institutions [PERCENTAGE]

Other goods and services

[PERCENTAGE] Salaries and wages

[PERCENTAGE]

0%

0% Pensions

10%

Other 4%

Samurdhi 2%

Fertilizer subsidy

2%

Other 18%




On 24th April 2020, in

the downgrading

statement, the Fitch

Ratings reports that

they expect the

COVID-19 outbreak to

push Sri Lanka’s

economy into a

recession in 2020,

against earlier

expectations of a

rebound. This would

weaken Sri Lanka’s

already-fragile fiscal

position.

slashed taxes from January in fiscal stimuli. Rate cuts were also

made in January despite a widening fiscal deficit. Large volumes of

money were ”helicopter-dropped” in the banking system to enforce

the lower rates in a monetary stimulus despite the country having a

pegged monetary regime with low credibility. Fitch Ratings lowered

credit ratings of Sri Lanka based on the assessment that the

country’s fiscal position has weakened substantially amid a COVID-

19-induced recession (EconomyNext, May 20, 2020).

Table 4.5: Sovereign Credit Ratings of Sri Lanka as at 20 May 2020

Agency Rating Outlook Date

Fitch B- Negative 24-Apr-20

S&P B- Stable 20-May-20

Government household relief programs

Under the Government Relief Fund (cash) transfer programs of LKR

5,000 per head, eight differently affected categories namely (1)

elderly (2) disabled (3) kidney patients (4) sick (5) senior citizens (6)

direct and indirect livelihood affected (7) public transfers (8)

Samurdhi recipients were benefitted. Although the official statistics

are still not available, a huge amount of money was added to

circulation through these programs. For example, the community

residing Beruwala Divisional Secretariat (DS) division alone received

LKR 243 million approximately. There are 256 DS divisions in the

country, not equal in geographical size and population. In most of

the DS divisions, all except government employees and pension

holders received these cash benefits. Some families collected more

than LKR 20,000 as a combination of a few categories. Therefore, the

money spent on household transfers by the government is

substantial.

Nevertheless, the government relief programme was substantially

supported by the local and international donors. For example, the

Government of Canada has provided more than CAD 56,000

(approximately LKR 7.5 million) to support Sri Lanka’s response to

the COVID-19 pandemic through targeted relief to some of those

most affected in vulnerable communities. The funds were granted to

the National Peace Council of Sri Lanka which is part of the Civil

Society Committee of the Presidential COVID-19 Task Force.


98



The impact on

tourism, automotive,

constructions,

manufacturing

including textiles &

garments will be

lasting over one year

or so, whereas

education, aviation,

banking & commercial

services and transport

will be recovered in a

short period of time,

hopefully within three

months.

4.12 Chapter summary

Though almost all the sectors of the economy hit by the COVID-19

this chapter investigated the impact on selected sectors of the

economy and following are the highlights:

The production and employment base of most MSMEs were

significantly hit by the COVID-19 pandemic. Approximately 80% of

enterprises was exposed to suffer production and employment

drops. More than 80% of the MSMEs are facing falling sales due to

delayed or cancelled orders by the domestic and foreign buyers. The

most severely affected enterprises were the "Accommodation and

food Service” sector, which is the major part of the tourism industry.

Nearly 10% of MSMEs in the apparel and textile industry in Sri Lanka

have shifted their production towards protective clothing such as

face masks under the pandemic environment. Approximately 15% of

MSMEs have benefited under the current crisis. Retail and wholesale

trade, Ayurveda medicine activities, and computer sales have been

continuing their business without a drop in sales.

The COVID-19 pandemic has kept investors in suspense since

February, putting markets in into high levels of volatility,

divestments, and flight into “safer haven assets”. The stock price, in

absence of speculation, is a reflection of the company’s business

performance. The COVID-19 badly hit or devastated industry sectors

such as tourism, aviation, automotive, constructions, manufacturing

including textiles & garments, whereas marginally boosted some

sectors such as agriculture, e-commerce, telecommunications,

pharmaceuticals, and medical service. The impact on tourism,

automotive, constructions, manufacturing including textiles &

garments will be lasting over one year or so, whereas education,

aviation, banking & commercial services and transport will be

recovered in a short period of time, hopefully within three months.

The textiles and garment industry recorded USD 5.6 billion of export

earnings in 2019. The estimated losses for the 3 months’ period 15th

March to 15th May round up to USD 1,400 million. The most

alarming signal is that 45% of the Sri Lankan export market depends

on the USA which is the most COVID-19 affected country in the

world, followed by the UK (14%), Italy (8%) and Germany (6%), the

second most severely COVID-19 hit country. Demand contractions

could result in a reduction of apparel exports by an additional 30 -




Tourist arrivals

reached the bottom

line. The expected

loss of revenue is

more than USD 300

billion. Zero income

resulted in the layoff

of temporary and

casual employees,

while permanent

employees are also at

high risk in job

security.

40% after June, due to mass cancellations of orders by buyers and

problems in the purchasing of necessary raw materials. These

circumstances, coupled with delayed shipments, forced discounts

and currency depreciation, have led to working capital problems

across the industry.

The construction sector was already suffering from delayed

payments for government-financed projects and lower demand for

high-end condominium developments. On this backdrop the

construction sector would face constraints in meeting contractual

agreements on completion dates and costs. While labour and

related issues would also affect the performance of the construction

sector in the short run due to health standards, the raw material-

related issues are also expected with the imposition of import

controls.

Consumer goods sales volume of large-scale institutions crashed

while the medium and small-scale businesses were willing to

normalize within several weeks after lifting the curfew. The

production capacity dropped by 50% as a result of the working from

home concept. The supply chain and the reinvestments of the

industry are at risk because of the profit loss and shrinking cash

flows. The changing lifestyles and income levels sharply affected the

consumer goods industry. The industry has to find new ways to

reach the customer in a more efficient manner.

Travel bans, mobility restrictions, lockdowns and border closures

disrupted global travel with the pandemic outbreak. Sri Lanka’s

tourism was significantly affected. Tourist arrivals reached the

bottom line. The expected loss of revenue is more than USD 300

billion. Zero income resulted in the layoff of temporary and casual

employees, while permanent employees are also at high risk in job

security with the current salary freeze. Around 20% of indirect

employees lost their income. Zero income created a financial

distress on investors who were trapped by indebtedness despite the

loan moratorium granted for a few months. Investors are likely to

leave the industry though there are no threats on mortgaged

property to foreclose.

With recent amendments in the tax laws the exact impacts of the

COVID-19 economic shock on revenue collection must be studied

carefully. The real impact of the pandemic will be seen towards the

end of the fiscal year as indicated in distribution of tax collection in a


100



year. All in all, as far as the fiscal policy is concerned, prolonged

fiscal deficit is highly likely to further escalate during the year. Thus,

the greatest challenge in financing this deficit is not to crowd out the

private investment, which, on one hand, will cost the future

economic growth of the country, and on the other hand, not to

expand external financing to an unmanageable level which will risk

both future growth and sovereignty of the country. S&P and Fitch

Ratings downgraded Sri Lanka sovereign credit ratings to B-. This

would weaken Sri Lanka’s already-fragile fiscal position as the credit

facilities will be tightened by international sources.

The fiscal position of the government has weakened following the

unexpected allocations for health facilities, imposing price ceilings

for essential food items, relief funds, strengthening social nets and

doubling household transfer payments, during the lockdown. The

household transfers which accounts for 18% of recurrent

expenditure for a normal fiscal year, would have increased by nearly

2% this year. During the COVID-19 pandemic, tax collection was

delayed. As a solution to the liquidity problem, the government

continued printing money in substantial amounts. For the two

months ending 30th April 2020, the government has printed money

more than LKR 200 billion, threatening the price stability of the

country. However, this helped a lot in sustaining the aggregate

demand at the required level to keep the economy on the move in a

distress situation where the vast majority has lost their income

sources.

On the one hand, while the assets quality of the Banking Sector is

expected to go down, the demand for credit will also go down, as

almost all leading sectors are confronted by the pandemic. On the

other hand, Non-Performing Loans (NPLs) are expected to go up in

the short and medium-term, which can be a risky. Even though

various regulatory measures have already been taken by the Central

Bank to give a positive shock to economic activities, the

effectiveness of such policies in reaching the expected outcomes is

questionable. Moreover, the most recent policy directions issued by

the Central Bank show that they are yet to address the real issue in

the system. Therefore, to reach the benefits of the revival policies

while ensuring the soundness of the financial system, it is inevitable

to face the trade-off between economic growth and price stability.

Non-Performing Loans

(NPLs) are expected

to go up in the short

and medium-term,

which can be a risky.

101

CHAPTER V

POLICY IMPLICATIONS FOR POTENTIAL RECOVERY ON POST COVID-19

Chapter V The economic impact of the COVID-19 pandemic in Sri Lanka

102



The lending rates of

the banks were

brought down but

even the approved

loans have not been

released fully until the

Central Bank

committed for

refinance.

Policy Implications for Potential Recovery on Post COVID-19

5.1 Introduction

Although the COVID-19 hit hard on Sri Lankan households, the

majority of its impacts is temporary, and is being recovered in the

post-COVID-19 period. The most vulnerable group in society is the

day payment workers and thus, government intervention is required

to protect their livelihood. During the COVID-19 pandemic, the

government implemented a relief package for such groups and need

good management in the process of distribution and its continuation

for months to come, while establishing necessary regulatory

measures to regain the whole economy.

Our prospect for the Sri Lankan economy in the second and third

quarters of 2020 is a negative growth. Sri Lanka has little hope about

the remedial measures about the sectors mostly dependent on the

global economy such as tourism receipts, foreign remittance and

earnings from garment and textiles. However, there are many

sectors in the economy that can be boosted by stimulating the

domestic aggregate demand. Aggregate demand expansion policies

can be prescribed in a crisis situation. We recommend using both

expansionary fiscal and expansionary monetary policy to increase

the aggregate demand.

5.2 Monitory policy

The Central Bank being the main regulatory authority of the financial

sector took action to ensure the soundness of the financial system

as well as the availability of the funds for the private sector at the

same time. Accordingly, the policy rates were adjusted downwards

expecting that banks would follow suite. The lending rates of the

banks were brought down but even the approved loans have not

been released fully until the Central Bank committed for refinance.

In fact, these excess funds were used by the banks to invest in

government securities to improve their assets quality.




The Central Bank

introduced a LKR 50

billion refinancing

facility to help Small

and Medium-term

Enterprises (SMEs).

The Central Bank

needs to monitor low

interest refinance

loans (at 4%) going to

finance genuine

working capital

requirements of SMEs

and affected

industries.

As an initial remedial measure, the Central Bank introduced a LKR 50

billion refinancing facility to help affected sectors of the economy.

Eligible sectors were identified as Small and Medium-term

Enterprises (SMEs), tourism, exports-imports-related business and

self-employment. This facility includes debt moratorium for up to 6

months for both individual and business loans. It also included new

provisions for NPLs. While some of the benefits of the packages

were not achieved, some measures were used by fixed income

earners who had no disruptions to their income source and they

were also enjoyed the benefits.

Paying attention to this issue and the failure of the Central Bank to

address the issue, the president was also critical about the issue. As

a result, the Central Bank took action again, to further reduce the

policy rates allowing excess cash into the system. As a result, the

Statutory Reserve Ratio (SRR) was adjusted downward by 200 basis

points to 2.0%; the lowest ever rate, with effect from the reserve

maintenance period that commenced on 16th June 2020. This

reduction is expected to inject approximately LKR 115 billion of

additional liquidity to the domestic money market, enabling the

financial system to expedite credit flows to the economy.

Further, according to the provisions in Section 83 of the Monetary

Law Act No. 58 of 1949, a new credit scheme was also introduced on

16th June 2020. Accordingly, in addition to the already disbursed LKR

27.5 billion under the refinance scheme introduced on 27th March

2020, the Central Bank will provide funding to Licensed Commercial

Banks (LCBs) at the concessionary rate of 1.0% against the pledge of

a broad spectrum of collateral, on condition that LCBs in turn will on-

lend to domestic businesses at 4.0%, while ensuring the greatest

possible distribution of this facility.

In addition, addressing the delayed payments for the construction

sector by the government, construction sector enterprises will be

provided with a facility to borrow from LCBs, using guarantees

issued by the government equivalent to the amount due on account

of contracts carried out in the past.

However, this move alone will not ensure economic benefits of the

availability of the excess cash in the system, which would re-

energize the economy unless steps are taken to ensure that the

benefits of these policies are levered into the general public. If it is

not like in all the other cases, the banks will play out with the


104



Close monitoring

requires as Non-

affected industries

also might apply for

low cost bank funds

and might redeposit

in banks at a higher

fixed deposit rate,

resulting in a negative

interest margin to the

banking sector.

Refinance needs to be

granted to

commercial banks on

a reimbursement

basis. Otherwise,

additional liquidity

could be used by the

commercial banks to

increase their

Treasury bill holdings.

concessions for their own benefits at the cost of national economy.

On the other hand, with the reduction of interest rates it will be

difficult to attract foreign investors to the bond market, which will

generate unnecessary complications as well.

Also, banks were given the chance to draw down the capital buffers

to ensure the credit flow of the financial system while the relaxation

of NPL clarifications expected to bring flexibility into bank balance

sheets. However, with the loan moratorium measures and other

measures imposed on the banking sector, it is expected that the

profitability of the banking sector will further decline.

All in all, the banking sector was absorbing adverse effects from not

only the ongoing pandemic but also the negative impacts of subdued

economic activities during the previous year. On this backdrop, the

sector is expected to experience a worsening balance of payment

conditions. The lower credit growth and the possibility of rising NPLs

would affect the quality of the assets and the liability structure of

the banking system. However, the investments in technology-driven

banking practices will benefit financial institutions in the post-

COVID-19 period as people get used to the new normal situation.

However, we recommend the following supplementary measures in

order to gain the maximum benefit of the expansionary monetary

policy.

1. The Central Bank to monitor low interest refinance loans

(at 4%) going to finance genuine working capital

requirements of SMEs and affected industries. Otherwise,

the purpose will be lost in the event these funds are

utilized to purchase real assets or increase unproductive

consumption.

2. Non-affected industries also might apply for those funds

and might redeposit in the banking sector at a higher

fixed deposit rate resulting in a negative interest margin

to the banking sector.

3. Refinance needs to be granted to commercial banks on a

reimbursement basis. Otherwise, additional liquidity

could be used by the commercial banks to increase their

Treasury Bill holdings. Also, this will compel the

commercial banks to do better credit evaluation before

granting loans and thorough follow-up after granting

loans.




SLTDA can propose

UNWTO to introduce

Destination Risk

Assessment Index

(DRAI) for the post-

COVID-19 period

enabling international

tourist to understand

country risk.

5.3 Fiscal policy

Overall, with the existing data, providing a clear picture on the

COVID-19 impact on the government revenue generation is

impossible. However, given that the government has been suffering

from fiscal deficit for so long, planning should be made to

expenditure rationalization and to prioritize the expenditure.

The government should not promise any further tax reliefs or spend

for unnecessary household transfer schemes with the aim of

winning the forthcoming General Election. On the other hand, the

government should look for alternative ways to curb the negative

impact of lower revenue by managing the state-owned enterprises

such as the Ceylon Petroleum Cooperation (CPC) and the Electricity

Board to make profits and to minimize the negative impact of the

revenue loss. However, as a support to the affected industries to

overcome their liquidity problems, the government can delay the

collection of EPF/ETF from such industries for a certain number of

months and delay the renewal of licence and other permits that tide

up business funds.

5.4 Supply side policies

However, it is a required industry-specific policy measure to regain

industries such as travel and tourism, MSMSE’s and the textiles and

garment industry.

In the case of travel and tourism, it is the most affected industry in

the world and thus Sri Lanka, by itself, is unable to regain fast in the

industry soon. However, as a popular destination, Sri Lanka needs its

own new travel and tourism strategies and policies and the SLTDA is

responsible. The policies should provide protection for both

stakeholders and visitors. Stakeholders need protection for their

financial distress while visitors must be protected in terms of health

conditions. It is requested that the areas of tourism most in

demand, such as Ayurvedic tourism, be identified. Online market

surveys are required for such activities. Government involvement

(primarily SLTDA) is indispensable in promoting the safety brand of

Sri Lanka as a safe destination in the post-COVID-19 period. More

tourism promotion campaigns are required around the world while

round-table discussions are needed with financial institutions and

investors in travel and tourism and government agents to retain the


106



The government

should take a policy

decision to purchase

all music instruments,

sport items and

classroom utilities

required for schools

from local

manufacturers.

current investors in the industry apart from attracting more new

investments until it the industry is normalized. There is a substantial

positive and negative effect of “word of mouth” in tourism.

Therefore, the government of Sri Lanka must initiate suitable

mechanisms to absorb the positive effect of word of mouth of the

early post-COVID-19 visitors to Sri Lanka.

Many of the countries regulate the tourism industry introducing new

policies and strategies for travel and tourism. Therefore, Sri Lanka

cannot expect a maximum number of visitors from its source

markets. The promotion of domestic tourism will be a valuable

alternative for regaining the industry since domestic demand is

expected to recover sooner than international demand according to

the UNWTO Panel of Experts survey. Policy-makers are advised to

follow the UNWTO recommendations since Sri Lanka as destination

heavily depends on the European market, as well.

SLTDA can propose UNWTO to introduce Destination Risk

Assessment Index (DRAI) for the post-COVID-19 period enabling

international tourist to understand country risk.

Micro, Small and Medium-Scale Enterprises have shown a downturn

growth during the pandemic. A government-led formal mechanism

should be established for developing linkages between MSMEs and

other complementary institutions which will direct to maintain the

sustainability of enterprises against the impact of the COVID-19

pandemic.

1. Promotion of the Public-Private Partnership Strategy

(PPPS) for enterprises and the establishment of planned

cluster-based enterprises may be the viable masterstroke

for the future enterprise development scenario in Sri

Lanka.

2. To address the financial issues of the enterprises, a SME-

friendly banking system shall be established under the

patronage of the Government and the Central Bank of Sri

Lanka.

3. A National SME Portal shall be established to keep the

important records of the enterprises in Sri Lanka. The

portal may be operative 24 hours a day to receive

problems and suggestions of MSMEs. The relevant

institutions examine these issues and suggestions of

enterprises to plan their timely support.




The government

should limit import of

certain products that

can be successfully

produced by SMEs in

the required quality.

These products

should include items

such as school bags,

shoes and slippers,

handmade paper,

toys, wooden and

plastic furniture and

kitchen items.

4. The government should take a policy decision to

purchase all music instruments, sport items and

classroom utilities required for schools from local

manufacturers.

5. The government should take a policy decision that all

government institutes, including schools, purchase

domestically produced healthcare products that are

needed in the post-COVID-19 period.

6. SMEs should shift a portion of their business online and

the District Chamber of commerce should initiate a

courier service, as another form of SME to home deliver

SME products.

7. The government should limit import of certain products

that can be successfully produced by SMEs in the

required quality. These products should include items

such as school bags, shoes and slippers, handmade paper,

toys, wooden and plastic furniture and kitchen items.

The Colombo Stock Exchange (CSE) has entirely shut down due to

the COVID-19 pandemic and was heavily affected by the closing

down of all economic activities. The major loss is the massive

outflow of foreign portfolio investments. The demand for the stocks

of many domestic companies is hindered by their underperformance

due to the pandemic. The debt moratorium for interest and capital

payments and tax concession will ease financial pressures on those

businesses. However, the government should not weaken the

liquidity levels of banking institutions that are still performing well in

the stock market, in its attempt to give concessions to other affected

industries. Promotional campaigns will help raise international

awareness and investor interest in Sri Lanka’s Stock Market. The

government has already started this not to promote the Stock

Market but to sustain the sovereign credit rating without falling to

CCC+. Encouraging firms to disclose their financial position and

business performance to shareholders, and declaring dividends for

the previous year will attract investors to the Share Market.

However, it is advisable not to pay cash dividends until the liquidity

positions of companies become normal.

The impact of the COVID-19 on the textiles and garment industry in

Sri Lanka is unprecedented and second to none in both demand and

supply sides. Recovery in the world market is beyond our control.


108



The Government can

suspend of EPF/ETF

deduction from

employers for 6

months as a

temporary relief to

maintain liquidity.

The following remedial measures are recommended to sustain the

supply side until the international markets reinstate.

1. To reopen factories having pending orders in hand,

subject to health directions, as early as possible, at their

full capacity to avoid any further trade shifts that may

take place in favour of competitors like Bangladesh,

Cambodia, Vietnam and Indonesia, which are still fully

operational despite the pandemic.

2. To explore new markets in play, including those related

to new products currently in demand in Europe and

North America.

3. Government approval to extend overtime (OT) hours

from the legally permitted 60 hours to 90 hours for the 3

months beginning from June for the benefit of factories

having overdue orders in hand.

4. To grant adequate loan facilities subject to the Credit

Support Scheme referred to in the Central Bank Circular

No.4 of 2020 dated 24th March 2020 to ensure the

working capital finance of SMEs. According to the

circular, SMEs are eligible to receive a six-month debt

moratorium and working capital finance at 4% interest

for at least 6 months, backed by refinance.

5. In the presence of an approximately LKR 650 billion

revenue loss due to tax cuts introduced following the

Presidential election last year, as well as delays in

revenue collection during the pandemic, this will create a

significant fiscal burden for the government to

implement such stimulus packages by itself. Thus, it will

be essential to issue directions to the commercial banks

to grant loan facilities sufficient to pay a minimum of two

months’ basic salary for the SMEs without collateral but

under the refinancing scheme of the government.

6. To suspend of EPF/ETF deduction from employers for 6

months as a temporary relief to maintain liquidity.

The engineering and construction sector is one of the core sectors

that provide a substantial contribution to the GDP. Upon examining

the challenges in the sector, the following possible policy directions

can be drawn: Labour-related issues can adhere to the involvement

of the government as a way of issuing a license or any other means

for workers to reach their working sites. On the other hand, if a




Also, the skilled Sri

Lankan workers who

returned from the

Middle East, South

Korea, Italy and a few

other countries are

now unemployed. The

government should

look at the possibility

of negotiating with

large foreign

construction firms

operating in Sri Lanka

to employ them as

workers instead of

getting down Indian

and Chinese labour.

second wave does not happen in the country, restrictions on human

mobility will be lifted as it is happening gradually at the moment. In

the medium run, in-site health inspection facilities would be

beneficial in large-scale construction projects to ensure a safe

working environment. Also, the majority of small-scale operators

should also be looked after with financial support. The cash flow -

related issues should be handled as soon as possible to ensure

smoothly-run operations, especially the delayed payments for

government-funded projects which should also be looked after with

a formal budget passed in Parliament for the better functioning of

the sector.

It is a prudent decision by the government to facilitate construction

firms to obtain low-cost funds from banks by surrendering their

pending government receipts as collateral. This will help them to

continue work and keep workers employed. The government should

make this request not only from the domestic banks but also from

the foreign banks like HSBC, Indian Overseas, Deutsche Bank AG

operating in Sri Lanka.

The government should force the foreign contractors who have

undertaken massive projects like highway construction to continue

their work schedules uninterrupted. That will generate multiplier

effects to increase national income.

Also, the skilled Sri Lankan workers who returned from the Middle

East, South Korea, Italy and a few other countries are now

unemployed. The government should look at the possibility of

negotiating with large foreign construction firms operating in Sri

Lanka to employ them as workers instead of getting down Indian

and Chinese labour.

Dropping of sales volume, loss of production capacity, decline of

working capital, and change of consumption patterns were the main

impacts of the COVID-19 on the retail and sales industry and the

following policy recommendations can be made to regain the

industry.

1. Introduce a mechanism for the supermarkets to buy

agricultural products and green harvest directly from the

farm gate without a middle man.

2. Promote advertising campaigns to change consumer taste

towards domestically produced goods/food items.


110



The Government

should limit import of

luxury items including

vehicles that cause

huge outflows of

foreign exchange until

economy get back to

normal.

3. Introduce an online ordering and home delivery system by

supermarkets.

4. Include small-scale retailers and wholesalers too in the

eligible category of low-interest working capital loans.

5. Reduce interest rates currently charged by the banks on

Pledge Loans and Local Trust Receipt Loans (LTR) for

wholesalers.

6. Encourage buyback agreements between farmers and

wholesalers.

7. Open highways free of charge for the delivery of goods for 4

hours per day at midnight, after the lift of the curfew.

As overall policies it will be advisable for Sri Lanka:

1. to limit import of luxury items including vehicles that cause

huge outflows of foreign exchange.

2. to limit imports of essential food items of which the domestic

supply is adequate.

3. to reintroduce import substitution for the goods that can be

produced by the local SMEs.

4. to attempt issuing long-term foreign currency denominated

by sovereign bonds and not to obtain any more credit by the

government from the domestic banking sector.

5. to start promotional programs internationally for Sri Lankan

tourism, Sri Lankan tea, Sri Lankan garments, healthcare and

education opportunities in Sri Lanka.

6. to suspend all household relief programs introduced during

the lockdown season and not continue targeting at winning

elections.

7. to introduce compulsory saving schemes for government

workers at least for one year. This will save the government a

total wage bill by at least by 5%.

8. to encourage telecommunications service providers to

extend their services widely to the remote and rural

communities.

The final conclusion is that many sectors are suffering from a short-

term impact while a few of the sectors, such as travel and tourism,

are in danger mid or long-term. Therefore, policy implications and

regulatory industry/sector-specific measures must be designed and

implemented while carefully investigating the interaction effect

among different sectors of the economy.

Appendices The economic impact of the COVID-19 pandemic in Sri Lanka



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University of Ruhuna

Published by the Faculty of Humanities and Social Sciences, University of Ruhuna, Wellamadama, Matara 81000, Sri Lanka.

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